article · Lafia Journal of Economics and Management Sciences
West African nations contend with high levels of external borrowing, substantial debt burdens, and limited domestic investment, all of which hinder international competitiveness. An analysis spanning 1990 to 2023 assessed how external debt interacts with domestic investment to influence competitiveness, measured through the real effective exchange rate. Because lower real effective exchange rates indicate stronger competitiveness, the finding that debt and investment combined generate a negative impact on the rate means that channelling external debt into domestic investment enhances regional competitiveness. Conversely, external debt servicing tends to undermine competitiveness across the region. Prudent debt management is therefore vital to direct external borrowing toward productive areas such as infrastructure, education, and innovation, ensuring that borrowed funds deliver sustainable economic gains rather than debt service distress.
Heavy debt burdens often drain the resources of developing economies. Demonstrating that borrowed funds can boost international competitiveness when channelled directly into domestic investment offers a clear rationale for economic policymakers. It highlights the importance of using foreign loans for productive domestic projects rather than consumption, helping governments protect long-term growth while managing external obligations.
This macroeconomic study provides empirical insights for public finance bodies, regional central banks, and development finance analysts rather than commercial enterprises. It operates at a policy and macro-planning level rather than offering a commercial product. The abstract does not indicate an application pathway for commercial technologies or private-sector products, presenting instead early-stage policy recommendations for sovereign debt allocation and national investment programmes.
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West African countries face significant challenges of high external debt accumulation, soaring external debt burdens, inadequate investment and weak global competitiveness which hampers their level of economic growth and development. Thus, this study investigated the interactive effect of external debt and domestic investment on global competitiveness among West African countries from 1990 to 2023. The Study used non-stationary heterogeneous panel model of pooled mean group estimator (PMG)based on the suggestion of the Hausman Test results. The findings revealed that a combination of external debt and investment produced a negative and significant impact on global competitiveness among West African countries. This implies that, if external debts are used for domestic investments, it will improve real effective exchange rate which is used as a proxy for global competitiveness. This is because higher REER connotes weakening competitiveness and vice versa and hence variables that have inverse relationship with it make it better. The study also found that external debt service has a tendency to weaken global competitiveness in West Africa. The study recommended among other measures prudent debt management practices to ensure that external debts are allocated effectively to productive sectors such as infrastructure, education, and innovation. This will help maximize the long-term benefits of external borrowing and reduce the negative impact of high debt servicing on economic growth and global competitiveness.
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DOI: 10.70118/lajems-10-1-2025-03
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