The effects of financial inclusion on external debt in Africa

Abstract

This study investigates the effect of financial inclusion on external debt in Nigeria, South Africa, Kenya, and Egypt, using annual time series data from 1990 to 2020. The data was sourced from the World Bank. The variables used in the study are market capitalization of listed domestic companies as a percentage of GDP, external debt stock, current account balance as a percentage of GDP, broad money (M3) as a percentage of GDP, and gross fixed capital formation as a percentage of GDP. The unit root test for stationarity was done using Augmented Dickey Fuller unit root test. The result of the unit root test informed the choice of Long Run Form and Bounds test, and Johansen Cointegration techniques for investigating long run relationships. The result showed the presence of a long run relationship between financial inclusion and external debt for Nigeria, South Africa, Kenya, and Egypt. The result also showed a positive relationship between financial inclusion and external debt. This is because a strong financial system will increase access to external debt because of good credit ratings. Granger causality results showed unidirectional causality from financial inclusion to external debt for only Nigeria and South Africa. More success in economic development can be achieved by focusing on financial inclusion strategies in Africa which would translate into numerous outcomes which include increasing domestic resources and increasing access to external debt with market competitive interest rates.