ON THE IMPACT OF EXTERNAL DEBT AND AID ON PUBLIC EXPENDITURE ALLOCATION IN SUB-SAHARAN AFRICA AFTER THE LAUNCH OF THE HIPC INITIATIVE

In the wake of the current financial and economic crises, the economies of Sub-Saharan Africa (SSA) find themselves squeezed between likely reductions in Official Development Assistance (ODA) and the pressing challenge to eradicate poverty. Public expenditure allocation to the social sector and to public investment is constrained by the need to pursue fiscal discipline, in order to avert debt distress. Within a framework of public expenditure choice (based on Fosu, 2007, 2008, 2010), the paper investigates the impact of the external debt-servicing constraint and external aid on government expenditure allocation in SSA countries after the launch of the HIPC initiative. Three-year panel over 1995-2009 for 40 low- and low-middle income SSA economies, of which 29 are HIPC, is used for the analysis. The findings suggest that the debt effect, while substantially lower than existing estimates for the pre-HIPC period, remains negative for the social sector, with education expenditure suffering the most from higher actual or predicted constraint-consistent debt servicing. ODA, particularly multilateral aid, has a significant positive effect on public investment. Moreover, recent relatively low levels of debt seem temporary and low-income countries are likely to contract additional debt to fill their funding gaps. This calls for appropriate measures, to be undertaken in order to prevent the deleterious effects of debt, especially on the social sector. The additional finding that government effectiveness favors public investment and spending in the social sector suggests that increased attention on governance is called for.