How does the changing financing landscape towards debt from international private creditors affect economic growth in developing countries?

Abstract

This paper analyzes the effect of the share of public and publicly guaranteed (PPG) external debt owed to private creditors on economic growth in developing countries. A subject that is little studied in the literature despite a changing of developing countries’ financing landscape towards debt form international private creditors. Using panel data over 1970-2021 from 70 low -and middle-income countries, the paper finds an inverted U-shaped relationship between economic growth and the private share of PPG external debt. Specifically, the result suggests a threshold around 46 percent beyond which the marginal effect of the private share of PPG external debt on growth becomes negative. The result captures well the case of several developing countries, including Chad, Ghana, Sri Lanka, and Zambia which have been seeking treatment under the G20 Common Framework or a similar mechanism, due to high levels of public external debt, including a significant share from private sources. In addition, the result also highlights that about 21 other developing countries, including some emerging economies have exceeded the threshold beyond which a further increase in PPG external debt from private sources would generate slower economic growth rates. Thus, the urgent need for action to avoid debt trap in developing countries.