Moderating effect of institutional quality on the external debt-economic growth nexus: Insights from highly indebted poor countries (HIPC)

This paper explored the moderating effect of institutional quality on the external debt-economic growth nexus in highly indebted poor countries (HIPC). This research topic has not received adequate attention in the literature despite the importance attached to it in the HIPC initiative. To achieve this objective, an interaction term of external debt and institutional quality was included in the model, which was estimated by means of a two-step system generalised method of moments (GMM) estimator. Estimates of the regressions revealed that institutional quality indeed affects the impact of external debt on economic growth. Also, institutional quality index, government stability, government effectiveness, and law and order mitigate the negative impact of external debt on economic growth, measures of corruption control and rule of law were found to exacerbate the negative impact. The thresholds of institutional quality beyond which external debt enhances growth were also determined. Policy implications arising from the study include the need for fiscal authorities in HIPC to review the existing institutional framework guiding the sourcing, disbursement and utilization of external debt with a view to finding out any loophole and lapse that prevents it from promoting growth.