Working Paper
The External Debt-Servicing Constraint and Public Expenditure Composition

The paper explores the impact of a binding external debt-servicing constraint on the sectoral composition of government expenditures in the economies of Africa, where this constraint has traditionally been most prevalent. Applying seemingly unrelated regression (SUR) to 1975-94 five-year panel data for 35 countries, the paper finds that the implied debt service burden adversely affects the share of public spending in the social sector, with similar impacts on education and health. Despite evidence that such a burden might also negatively influence public investment, the deleterious implications of debt servicing appear to be primarily a social-sector phenomenon. The partial elasticity on the sector's expenditure share is estimated at 1.5, which is by far the highest among all the explanatory variables considered, including external aid, whose estimated effect on the social sector is positive but with an elasticity of only 0.2. Aid also positively affects public investment with a similar elasticity of 0.2. Constraint on the executive exercises significant positive and negative impacts, respectively, on capital and agricultural spending, and also appears to positively influence health expenditure. In addition, expenditures in the social sector have been tending upward, despite the structural adjustment programmes of the 1980s, and even prior to the Highly Indebted Poor Countries (HIPC) Initiatives that have tended to emphasize spending in the social sector.