Causal Relationship between Africa's Growth and Chinese Debt Financing for Infrastructure Development

The contribution of this study is two-fold. First, the study is conducted in response to the growing concerns about the surge of Chinese debt financing for infrastructure development in Africa. Second, while addressing the latter, the study concurrently adds to the ongoing debate on the economic growth-public debt nexus in Africa, typically external public debt. We propose a theoretical argument based on literature that the source of debt and prioritized sectors ought to be explicitly considered when analysing the link between economic growth and public debt. Hence, this study explores the causal relationship between economic growth and Chinese debt financing for infrastructure development in Africa. In general, the literature confirms that optimal external debt investment in productive sectors such as infrastructure development can enhance fiscal stimulus and the growth payoffs are more sustainable to relatively less developed countries. It can, thus, be argued that Chinese debt financing for infrastructure projects can stimulate Africa's economic growth in the long-run. Against the expectation, our results using the VAR technique in the endogenous growth framework for the period (2000-2019) indicate that a one-time shock to Chinese loans on transport infrastructure in the short-run bears a long-run negative impact on Africa's growth, whereas the impact of Chinese loans on power and communication infrastructure is insignificant. These findings suggest a lack of productivity in all Chinese debt-financed infrastructure projects, and government corruption is assumed to be the main cause.