External Debt & Economic Growth: Case of Tunisia

Abstract

The main objective of this paper is to explore the influence of external debt (measured by two indicators that are outstanding debt and debt service in relation to exports of goods and services) on investment and economic growth in Tunisia during a period of 51 years which runs from 1961 to 2011, using vector autoregressive model (VAR). The empirical results show that, in the short term, outstanding debt and debt service in relation to exports of goods and services do not cause economic growth. In the long term, the external debt service is detrimental to Tunisian economy. In Tunisia, the problem is not a debt problem in itself, but the problem concerns the use of this debt. External debt is allocated to activities with both low added value and profitability. In the absence of a clear industrial policy, these activities are traditional activities that do not create wealth, correspond with competitive advantages of the country and employ the qualified workforce. Therefore, the unemployment rate of graduates increases regularly. Furthermore, a significant share of borrowed funds are intended to pay the salaries of the public sector, that have represented more than a third of the state budget in recent years. Then, external debt did not help the country to develop because those salaries went into consumption of some imported goods that are not produced in the home market.