The Impact of External Debt and Exchange Rate Volatility on Domestic Consumption in Sub-Saharan Africa

Domestic consumption as the driver of economic growth in any country influences productive activities, employment, and macroeconomic policy decisions. The literature concentrated mostly on income and the interest rate as the determinants of domestic consumption with the recent addition of changes in the real exchange rate and its volatility as critical factors influencing consumption decisions, as countries are becoming open to the global market. However, with the current external debt crisis in Sub-Saharan African countries, this study examined the impact of external debt and exchange rate volatility on domestic consumption in Sub-Saharan Africa in both the short run and long run; sampling twelve Sub-Saharan African countries for the period of 1990–2021. The study utilized a pooled mean group (PMG) estimator of dynamic heterogeneous panel technique and generated exchange rate volatility using generalized autoregressive conditional heteroscedasticity (GARCH). Our study discovered that while external debt service has a huge negative impact on domestic consumption in the long run, the external debt stock has a long-run positive and significant impact on domestic consumption. Moreover, the exchange rate in Sub-Sahara Africa is persistently volatile and its volatility has both positive and negative impacts on domestic consumption. Our study suggests that external debt may be used to stimulate domestic consumption if it is channeled into infrastructure development and productive activities with high yields to service and liquidate the debt while stabilizing the exchange rate.