External debt and fixed capital investment nexus in middle-income countries in Sub-Saharan Africa: A quantile regression analysis

Abstract

Fixed capital investment promotes growth and economic transformation. In sub-Saharan Africa (SSA) countries face limited domestic savings, fluctuating commodity prices, and vulnerability to global economic shocks. External debt remains as an alternative source of financing fixed capital. Excessive borrowing exposes countries to a debt overhang, which impedes future capital investment. Due to limited evidence on the external debt-investment nexus in SSA, this study investigates how external debt impacts fixed capital investment in middle-income countries for the period 1990 – 2020. Quantile regression analysis is used to account for the differential effects of exogenous variables on fixed capital investment. The findings reveal the existence of heterogeneous effects of all covariates. Diverging from previous studies, results confirm a non-linear relationship between external debt and fixed capital investment. Specifically, the study shows differential borrowing patterns at various levels of fixed capital distribution: countries at lower levels of distribution tend to borrow less, whereas those at higher levels borrow more. Trade balance has a negative impact, while other covariates, namely, general government consumption final expenditure, economic growth, and institutional quality, have positive impacts across the distribution of fixed capital investment. The findings emphasize the importance of considering the varying influence of these factors on different investment quantiles when designing policies, rather than relying solely on average effects. Furthermore, risk mitigation strategies can be developed by ensuring that countries at higher levels of distribution may leverage more external debt finance, while those at low levels adopt austerity.