The Share of External Debt and Economic Growth

It is a well-known fact that many developing countries are faced with high levels of indebtedness (relative to their GDP). This issue has gained much attention during the
recent decades as many countries have experienced lasting budget de cits which lead to
sharp increases in debt-to-GDP ratios, and for many, a large share of external debt.1
Many authors argue that these high levels of debt (especially external) have a negative
e ect on economic growth (Afxentiou 1993).

This negative relationship is often attributed to “`debt overhang”‘ which is de ned as the situation in which the expected repayment on external debt falls short of the contractual value of debt, and therefore expected debt service is likely to be an increasing function of the country’s output level (Krugman 1988). These high debt servicing costs place a strain on the scal situation of the country and on the overall prospects of its economy.

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