Foreign AId, External Debt and Economic Growth Nexus in West African Countries: The Role of Institutional Quality

This study empirically examined the nexus between foreign aid, external debt and economic by assessing the role of governance/institutional quality in 16 West African countries from 2000 to 2024. The study employed panel ARDL, and Dumitrescu & Hurlin panel causality test methods for the analysis. Results indicate that foreign aid exerts positive effect on economic growth but solo external debt negatively affects economic growth. However, institutional quality-external debt interaction has a positive effect on economic growth. This strongly suggests that external debt promotes growth only if judiciously utilized. On the other hand, gross fixed capital formation (GFCF) and foreign direct investment (FDI) all portray positive influence on growth in the long-run. Furthermore, the short-run results reveal that foreign aid is the only significant driver of growth; all other variables do not show significant effects in the short-run. The adjustment mechanism, ECM, is significant negative index confirming that deviations from long-run equilibrium path are corrected over time (about 10% adjustment per period). The findings indicate that economic growth is contingent upon gross capital formation, foreign direct investment, and effective utilization of external debt. These findings have important implications for policymakers in West African countries that are currently facing major fiscal and external imbalances due to high expenditure on infrastructure, worsening trade balance, and financial loss due to the leakages and embezzlements. Thus, there is the need for urgent attention of fiscal authorities of West African economies to use external debts efficiently, reduce fiscal deficits and mitigate external imbalances