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Working Paper 85 - On Measuring Indebtedness of African Countries: A Stochastic Frontier Debt Production Function
Foreign debt represents an important source of finance in most African countries where it supplements low savings, narrow export earnings, and thin tax bases. The main reasons for external borrowing by a sovereign country are to smooth consumption over time and to allow a country to invest more now with less of a sacrifice of current consumption. The costs of the external borrowing are supposed to be covered by the future returns from the investment. However, in Africa, much of the debt repayments have been rescheduled repeatedly, with the effect that Africa’s debt has continued to climb virtually unabated during the 1980s and early 1990s. For many African countries, the situation has been severe, with the debt overhang having a negative impact on new investment and economic growth.