Beyond Macroeconomics: Transmission Channels of Debt and Institutional Quality to Sustainable Development in Sub-Saharan Africa

This study examines the short-run and long-run impacts of external debt and institutional quality on sustainable development in Sub-Saharan Africa (SSA), using dynamic panel GMM estimation and panel ARDL ECM for robustness. It further explores four transmission channels, foreign direct investment (FDI), gross fixed capital formation (GFCF), inflation, and debt servicing. Results confirm that external debt positively influences sustainable development only when complemented by strong institutional quality. The negative and significant interaction between debt and weak institutions underscores the risk of debt undermining sustainability in poorly governed environments. Transmission channels reveal that inflation poses a mild threat to sustainability, while FDI, GFCF, and debt service lack consistent significance. These findings suggest that institutional quality is the most vital factor in enhancing the developmental returns of debt-financed interventions.