Foreign Debt and Economic Growth. A Case of Selected LDCs

The ultimate goal of the study was to examine the impact of foreign debt on economic growth in selected Less Developed Countries (LDCs) for the past two decades, the nature of data was across countries and time, then fixed effect panel data modelling techniques were adopted. The study used the Hausman test to determine whether to use Fixed effect or Random effect and the results of Prob > Chi2 determine what type of panel should be used. Test for serial autocorrelation and heteroscedasticity using Modified Wald test for heteroskedascity and Wooldridge test for serial autocorrelation were used and in both test the p values was < 0.05 indication failing to reject null hypothesis which states there is no heteroscedascticity nor serial autocolection in the fixed effect model. The findings for the Fixed Effect Model showed there is a negative impact of external debt on economic growth in LDCs, proving true the theory of debt overhang effect which was used in the study. While inflation and foreign direct investment being insignificant to the economic growth indicating that if they are well controlled they will help to mitigate the negative impact of foreign debt on economic growth. The study also shows the amount of debt accumulation and suggested reasons for such accumulation in each selected country. Moreover, economic policies were formulated basing on International Financial Institution and what should the LDCs learn from MDCs and what should MDCs do to LDCs to mitigate the negative impacts of foreign debt on the economic growth.