Nonlinear Debt-Growth Dynamics in ECOWAS: A Regime-Switching Threshold Analysis

Abstract

Rising external debt across Economic Community of West Africa States (ECOWAS) has renewed concerns about debt sustainability and its implications for long-run economic growth, yet existing empirical evidence remained mixed and often methodologically constrained. This study examined whether the external debt-growth relationship in ECOWAS is nonlinear and whether a statistically meaningful debt threshold exists beyond which external borrowing becomes growth-inhibiting. Addressing this question is important given the resurgence of external borrowing in the region and the limited ECOWAS-specific evidence using dynamic nonlinear frameworks. Using an unbalanced panel of 14 ECOWAS countries over the period 1996-2024, the study employed a dynamic panel threshold regression approach that explicitly accounts for growth persistence, unobserved heterogeneity, and endogeneity. The results identified a significant external debt threshold at 64.68 percent of GDP. Below this level, external debt exerted no statistically significant effect on real GDP per capita growth, suggesting that moderate borrowing neither constrained nor substantially accelerated growth. In contrast, once external debt exceeds the threshold, its impact became negative and economically meaningful. The analysis further showed that fiscal deficits condition the debt–growth relationship, with better managed deficits mitigating adverse growth effects in high-debt regimes. By providing updated, region-specific threshold estimates using a dynamic nonlinear framework, this study contributes to the debt–growth literature by refining the understanding of sustainable external borrowing in ECOWAS. The findings offer quantitative benchmarks that complement existing theoretical and empirical work and have direct relevance for debt management and fiscal policy design in highly indebted low-income economies.