External Debt-Servicing Constraint and Public Expenditure Composition in Sub-Saharan Africa

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This study explores the responsiveness of public-expenditure composition to the external debt-servicing constraint in sub-Saharan Africa (SSA). Arguing that observed debt servicing is too ‘noisy’, the paper first predicts debt-service ratios intended to reflect the constraint, and then employs these new data in Seemingly Unrelated Regression of five-year panel involving up to 35 African countries during the 1975-1994 pre-HIPC period, when the constraint was likely binding. The study finds that the debt-constraining variable adversely affects the share of public spending in the social sector. The variable has similar impacts on education and health. The study also finds that the debt effect is primarily a social-sector phenomenon.

The implied partial elasticity of the sector’s expenditure share is estimated at 1.5, which is by far the highest responsiveness among all the explanatory variables considered, including external aid. Meanwhile, observed debt service is found to be a poor predictor of expenditure allocation.