Effects of the foreign debt burden on saving ratios in the CEMAC zone

Given the increasing scarcity in foreign aid, the poor saving performance in Sub-Saharan Africa over the past three decades is a matter of grave concern. So what is the cause of the effect of this poor saving in the central African sub-region (the CEMAC Zone)? This paper attempts to analyse poor saving performance in the CEMAC zone.

The paper finds that:

• one reason why five out of the six countries of the zone have been classified as heavily indebted poor countries is because in the short run, foreign saving crowds-in national saving, where as in the long run foreign saving crowds-out national saving or by inducing Dutch-disease effects in the economy
• there is a positive link between the national saving ratio and improvements in the terms of trade as an improvement in the terms of trade increases income and therefore the level of national saving
• the CEMAC countries rely on only a few commodities for export earnings, which are sold in highly volatile markets, therefore the level of national savings are expected to be higher with transitory improvements in the terms of trade
• increases in major international rates such as the London Interbank Offered Rate (LIBOR) help in destroying national saving in the sub-region by rendering the economy less competitive
• there is a negative and significant relationship between the ratio of net government credit to total domestic credit and the national saving ratio, thus, as the government grants more credit to the private sector, this reduces the amount of national savings

The author argues that the size of the foreign debt and debt service payments of the CEMAC countries is compounded by poverty and the structural weakness of the economies of these countries. As CEMAC countries produce and export the same export, primary products, they have not been able to diversify their export base to take care of the changing world economic conditions. The paper concludes that:

• debt overhang is a reality in the Central African Sub-region
• the heavy debt burden of the CEMAC countries has militated against any rapid economic growth and development
• a satisfactory recovery of investment and output growth in the zone will remain a far dream as long as the debt burden that requires the transfer of enormous resources abroad that impairs saving remains in place
• many believe that a necessary condition for economic growth and development is debt relief that goes beyond rescheduling, however to effectively effect such a relief, it would be wise to know to what extent the debt burden has been deleterious to economic variables in the zone
• there is a causal relationship between the foreign debt burden and the saving ratio
• given that five countries in the CEMAC zone are classified as heavily indebted poor countries (HIPCs), the results of the regression model have shown how the continuous accumulation of debt over time has pushed these countries to reach this stage
• debt has been seen as one of the causes of the development problems of the sub-region, but debt is an integral component in intensifying the vicious circle of the sub-region’s decreasing performance and increasing marginalisation