DEBT OVERHANG AND DUAL GAP PERSPECTIVE ON HUMAN DEVELOPMENT IN WEST AFRICA: INSIGHTS FROM THE GHANAIAN AND NIGERIAN ECONOMIES
Abstract
This study focused on the influence of debt overhang and dual gap theory on human development in West Africa. To enhance its efficacy and promote human development in Ghana and Nigeria, it aimed to assess the significance of the external debt burden and propose solutions. Employing an ex-post facto research design, several macroeconomic and human development variables were utilized to achieve the study's objectives. Two ECOWAS countries were selected to constitute the study's population and sample size. The data were aggregated, analyzed, and tested using countryspecific descriptive statistics and ARDL analysis procedures. The analysis revealed that the foreign debt burden had a significant, though negative, impact on Ghana's human development index, while the external debt service payment to gross domestic product was not significant. Furthermore, the external debt service payment to gross domestic product and external debt burden both non-significantly and adversely affected the human development index in Nigeria. This suggests that education, health, and per capita income—all components of the Human Development Index (HDI)—decline as the share of revenue allocated to debt servicing increases. This also occurs as additional debts are incurred, especially beyond the capacity of most West African Monetary Zone member economies. Based on these findings, the study recommended that to reduce Ghana's reliance on external debt funding, the country's economy should consider the external debt thresholds while formulating its external debt management policy. To address the resulting fiscal imbalance, domestically generated revenue—especially tax revenue—should be revitalized and increased to significantly minimize tax evasion and avoidance. The Nigerian government should also seek loans with favorable terms and conditions following a thorough assessment rather than solely based on need, to reduce the cost of debt and alleviate the negative effects of external debt and associated payment obligations. A robust capital market will lower the borrowing rate from external sources.This study focused on the influence of debt overhang and dual gap theory on human development in West Africa. To enhance its efficacy and promote human development in Ghana and Nigeria, it aimed to assess the significance of the external debt burden and propose solutions. Employing an ex-post facto research design, several macroeconomic and human development variables were utilized to achieve the study's objectives. Two ECOWAS countries were selected to constitute the study's population and sample size. The data were aggregated, analyzed, and tested using countryspecific descriptive statistics and ARDL analysis procedures. The analysis revealed that the foreign debt burden had a significant, though negative, impact on Ghana's human development index, while the external debt service payment to gross domestic product was not significant. Furthermore, the external debt service payment to gross domestic product and external debt burden both non-significantly and adversely affected the human development index in Nigeria. This suggests that education, health, and per capita income—all components of the Human Development Index (HDI)—decline as the share of revenue allocated to debt servicing increases. This also occurs as additional debts are incurred, especially beyond the capacity of most West African Monetary Zone member economies. Based on these findings, the study recommended that to reduce Ghana's reliance on external debt funding, the country's economy should consider the external debt thresholds while formulating its external debt management policy. To address the resulting fiscal imbalance, domestically generated revenue—especially tax revenue—should be revitalized and increased to significantly minimize tax evasion and avoidance. The Nigerian government should also seek loans with favorable terms and conditions following a thorough assessment rather than solely based on need, to reduce the cost of debt and alleviate the negative effects of external debt and associated payment obligations. A robust capital market will lower the borrowing rate from external sources.