Rethinking foreign debt–sustainable development nexus

Abstract

Purpose Due to the inconclusiveness of the recent debate on the effect of foreign debt on sustainable development, the aim of this study is to decompose foreign debt into components based on World Bank's definition, namely short-term foreign debt, long-term foreign debt and International Monetary Fund credit (IMF credit) so that the individual effect of short-term foreign debt, long-term foreign debt and IMF credit on sustainable development could be examined in order to correct the limitation in previous studies that employed aggregate foreign debt and show mixed results. Design/methodology/approach The study employs the ordinary least squares (OLS) technique. The study also engages the Driscoll–Kraay covariance matrix technique to check the robustness of the OLS estimates due to spatial interactions and unobserved common factors issues that mostly arise in panel modeling which the OLS technique may not detect. To account for endogeneity, the study uses the system generalized method of moments (GMM), and in addition, utilizes a dynamic panel threshold technique within the GMM to inspect the possibility of having thresholds of foreign debts in the foreign debt–sustainable development nexus. Findings The study found that an increase in long-term foreign debt and IMF credit weakens sustainable development. It also found that short-term foreign debt has no relationship with sustainable development. In addition, it found optimal levels of long-term foreign debt and IMF credit that weaken sustainable development. Originality/value The study is the first to examine the individual effect of IMF credit, long-term foreign debt and short-term foreign debt on sustainable development.