Public investment efficiency, economic growth and debt sustainability in Africa

Investment is an important driver of economic growth with important implications for debt sustainability. Investment efficiency gaps adversely impact debt sustainability in Africa. The current heightened fiscal vulnerabilities can be attributed to external factors including volatile commodity prices particularly for commodity-exporting countries and health challenges like COVID-19 pandemic that weakened fiscal revenues and growth. In addition are domestic factors such as elevated government spending on the back of big-push investment expenditures to close infrastructure gap, increased security expenditures in response to conflict and social unrest in some countries. Using a dynamic stochastic general equilibrium (DSGE) framework, we estimate the role of debt in the provision of productive investments, driving economic growth and subsequent debt sustainability. To entrench fiscal sustainability, countries need to strengthen domestic resource mobilization and improve public investment management for greater efficiency. Measures to increase tax revenue collections, savings mobilization and efficiency of public spending are therefore critical. It is prudent for development partners to support debt reporting, data harmonisation, tax compliance, combating illicit financial flows and developing effective debt resolution frameworks.