Nexus between Domestic Debt and Capital Formation in Sub-Saharan African Countries: A Panel Quantile Regression Approach
- Ibrahim Anas Kubalu , School of Economics Finance and Banking, Universiti Utara Malaysia, 06010 Sintok, Kedah, Malaysia.
- Mohamad Syafiqi Hashim , School of Economics Finance and Banking, Universiti Utara Malaysia, 06010 Sintok, Kedah, Malaysia.
- Sallahuddin Hassan , School of Economics Finance and Banking, Universiti Utara Malaysia, 06010 Sintok, Kedah, Malaysia
Keywords:
Domestic Debt, Capital Formation, Crowding-Out Theory, OLS, WLS, SSA Countries..
Abstract
The study explored the influence of domestic debt on capital formation in Sub-Saharan African (SSA) countries, using panel data spanning from 1990 to 2020. Panel Quantile Regression techniques were employed to analyse the data. Results from panel non-linear unit root tests indicated the presence of both stationary and non-stationary variables after differencing. The panel quantile regression revealed a negative and statistically significant relationship between capital formation and domestic debt at the lower 75th percentile, while at the 90th percentile, the impact was negative but statistically insignificant. Similarly, similar negative effects were observed for the PUBD and TROP variables. The study also identified that external debt (EXTD), GDP, inflation (INFR), and interest rates (INTR) positively influence capital formation (CAPF), with the strongest effects seen at the 50th, 75th, and 90th quantiles compared to OLS results. Quantile regression further confirmed that capital formation decreases as domestic debt increases, a trend that was consistent across both OLS and WLS models, as well as the panel quantile regression outcomes. The study suggests that the rising domestic debt in SSA countries negatively affects capital formation, hindering economic growth. To foster greater capital formation and integration into the global economy, SSA countries should focus on comprehensive tax reforms. Such reforms could help boost tax revenues, similar to advanced and emerging economies, which tend to generate double the average tax income of SSA nations.