Evaluation of the Equilibrium Level in Economic Growth under Influence of External Debt

Abstract

This paper is an attempt to develop Cointegration and Error Correction Model (ECM) that evaluates the effect of external debt sustainability on economic growth of Sudan; then, compares the long run relationship between external debt and economic growth. The compatibility of the two methods together will be assessed in comparing the results. The data retrieved from World Development Indicators (WDI) of The World Bank for the period 1978-2011. The empirical results showed that trade openness, inflation, capital formation and measures of external debt sustainability have a significant impact on the economic growth of Sudan. Furthermore, this result is confirmed by the estimates of both Johansen Cointegration and Engle Granger error correction method. However, the later showed that initially, effect of the changes in the explanatory variables on economic growth is above the equilibrium. The equilibrium level is achieved extremely slowly as the speed of adjustment in economic growth is found to be a fraction of zero.

Keywords: Sudan, Economic Growth, Cointegration, External Debt, Error Correction, Sustainability