Global Journal of Human Social Science, E: Economics, Volume 21 Issue 4

Domestic or Foreign Debt ? A Choice of no Wrong Selection David Owuor α , Dr. Elijah Museve σ , Dr. Arvinlucy Onditi ρ & Dr. Michael Nyagol Ѡ Abstract - This paper reviewed the matter of balance and trade- off between domestic debt and public debt. The study sought to underpin the general consensus on the issue of debt and how economic activities were impacted by the various forms of public debt. The paper gives an overview of different countries experience with regards to debt sourcing. Various authors express various views with regards to this question that do not necessarily bring about points of convergence in ideologies. The general point of agreement of specialists who have looked into this subject matter is established at the use of the debt acquired. If debt is acquired to facilitate development projects then there is no doubt that such debt will resultantly bring about economic growth and economic development. On the other hand there are some governments that do borrow for to finance recurrent expenditure however much that this increases consumption within the economy, the desired growth and development is hardly achieved. Worse still some of the funds acquired as a result of debt in some nations are squandered and pocketed by few individuals and this is very significant in the retrogressive states of many countries with weak systems that provide no serious check mechanisms as well as accountability and ownership of responsibility. The review established the concurrence on usage of debt while still the subject matter of domestic and foreign debt still remaining empirically divergent. This study established that CBK Overdraft and Bilateral debt had positive and significant effect on Economic Growth. Keywords: domestic debt, foreign debt, economic growth, debt overhang, crowding out. I. I ntroduction triking a balance between domestic debt and foreign debt presents a challenge as discussed in debt overhang theory. Albeit a sound equilibrating policy or guideline is required to ensure economic growth and development are met with utmost efficiency. Public debt refers to the total of the nation's debts which covers debts of local and national governments indicating how much public spending is financed by borrowing instead of taxation (Makau, 2008). According to (Patenio & Tan-Cruz, 2007), a public debt is a debt owed to both external and internal parties by a government of an independent country. This is an indication that nations have liberty to bridge their budgetary deficits within the local markets or international financial markets. (Mahara & Dhakal, 2020) Found that fiscal deficit, trade openness, and foreign aid are major macroeconomic determinants of external debt in Nepal. From the obtained results, it is seen that an increase in foreign aid helps to significantly reduce external debt but trade openness and the budget deficit significantly leads to an increase in external debt both in the short- run as well as in the long-run. The error correction term is found to be significant and negative, showing proof of a strong association between the selected variable and ensures the correction of short-term disequilibrium to a stable equilibrium at the rate of 37 percent per annum. The study concluded that foreign aid, budget deficit, and trade openness were the main determinants of external debt in Nepal in both the long-run and short- run. Appropriate export-import or foreign trade policy, effective demand management policy, progressive tax system as well as monitoring tax evasion, effectual and productive utilization of available resources helped to reduce debt accumulation and saves the nation from the possible debt trap. (Benli, 2020) investigated the long run dynamics of external debt burden – economic growth nexus as well as the nonlinearity in the debt-growth relationship in Turkey over the period 1970-2018. Using a multivariate model in which real output growth, external debt burden, domestic investment, exports and population growth are included as variables we employ Autoregressive Distributed Lags (ARDL) bounds testing approach to cointegration. The empirical findings indicated that the external debt burden harms economic growth in Turkey. The preliminary evidence presented here also does not appear to support the hypothesis of the debt Laffer curve in Turkey for the study period. (N'Zue, 2020) sort to determine the impact of external debt on economic growth in the ECOWAS region. Panel data spanning from 1990 to 2016 was used and analyzed using panel CS-ARDL estimation approach. The results indicated cointegration among the variables. The study found that external debt has a positive impact on economic performance up to a threshold. In the short run, the threshold stood at 45% and in the long run, it stood at 42.52%. Beyond these points, additional external debt accumulation negatively affects the regional economic performance. Knowing that the level of the region’s external debt-to-GDP ratio S Volume XXI Issue IV Version I 43 ( E ) Global Journal of Human Social Science - Year 2021 © 2021 Global Journals Author α σ : School of Business and Economics, Department of Accounting and Finance, Jaramogi Oginga Odinga University of Science and Technology. e-mails: owuord82@gmail.com , elijahmuseve74@gmail.com Author ρ Ѡ : School of Business and Economics, Department of Management and Economics, Jaramogi Oginga Odinga University of Science and Technology. e-mails: lucionditi@gmail.com , michael_nyagol@yahoo.com