This study examines the relationship between external debt and economic growth in the BRICS countries. It explores how BRICS integration can aid these economies and newly joined countries in solving the debt problem. Using the latest panel data techniques and country experiences, we employed the panel mean group method (PMG) and interrupted time series analysis (ITSA) for South Africa, who joined in 2010. Results show a negative relationship between external debt and economic growth at the group level, with mixed results for individual countries. Using individual country experiences, valid implications are drawn for debt-stressed countries like Ethiopia and oil-rich nations like Saudi Arabia. Integrating new member countries in BRICS can overhaul the existing system towards broader perspectives of reforms in global financial institutions. Integration into the BRICS association can benefit these countries through reforms in global financial institutions, fairer debt restructuring, joint investment projects, macroeconomic coordination, debt management knowledge sharing, innovative financing, and collective advocacy for debt relief to enhance stability and resilience.

В данном исследовании рассматривается взаимосвязь между внешним долгом и экономическим ростом в странах БРИКС, а также вопрос о том, как интеграция БРИКС может помочь участникам организации, включая вновь присоединившиеся страны, в решении долговой проблемы. Используя новейшие методы работы с панельными данными и опыт стран, мы применили метод группового среднего значения (PMG) и анализ прерывистых временных рядов (ITSA) для Южной Африки, которая присоединилась к проекту в 2010 году. В исследовании впервые использовался метод группового среднего значения (PMG) и анализ прерывистых временных рядов (ITSA) для изучения влияния внешнего долга на экономический рост в странах БРИКС. Результаты показывают отрицательную связь между внешним долгом и экономическим ростом на уровне группы, при этом результаты по отдельным странам неоднозначны. Анализ опыта отдельных стран позволяет сделать выводы для экономик, испытывающих долговую нагрузку, таких как Эфиопия, и для стран, богатых нефтью, таких как Саудовская Аравия. Включение новых стран в БРИКС может вызвать перестройку существующей системы в сторону больших возможностей реформирования глобальных финансовых институтов. Интеграция в БРИКС может принести пользу этим странам благодаря реформам в глобальных финансовых институтах, более справедливой реструктуризации долга, совместным инвестиционным проектам, макроэкономической координации, обмену знаниями по управлению долгом, инновационному финансированию и коллективным выступлениям за облегчение долгового бремени, повышение стабильности и устойчивости.

External debt, Economic growth, BRICS, Newly joined countries, Integration, PMG model

внешний долг, экономический рост, БРИКС, вновь присоединившиеся страны, интеграция, модель PMG

The distinct impact of foreign debt liability on economic growth is a highly debated topic in macroeconomics. In the past two decades, global public finances have faced significant economic catastrophes, including the 2008 International financial crisis and the pandemic-driven global downturn. Governments worldwide responded with substantial financial guarantees and provisions to address the critical needs of private ventures and households (Dougherty & Biase, 2021). This monetary stimulus was primarily funded by significant government borrowing, resulting in a massive increase in public debt. In emerging nations, public debt reached $11.5 trillion in 2021. According to an IMF study in 2022, $400 billion was spent on debt servicing alone. Consequently, the World Economic Forum identified widespread country debt evasion as one of the significant global risks for the future.

Studying external debt within BRICS is crucial to understanding contemporary global economic dynamics. Representing more than 40% of the world’s population and about one-fourth of the global GDP, the BRICS nations are pivotal players in the international financial landscape (IMF, 2022). Their robust economic growth has driven global economic expansion, especially after the 2008 financial crisis. However, these countries face significant public and external debt burdens, with public debt ranging from 21% (Russia) to 92.68% (Egypt) and external debt from 15.7% (Russia) to 42.4% (Egypt) (World Bank, 2023). Monitoring their debt dynamics is essential for assessing the sustainability of their growth trajectories. These nations are attractive destinations for foreign investment thanks to their vast consumer markets, abundant natural resources, and rapidly expanding infrastructures (WEF, 2023). Effective external debt management is crucial for maintaining investor confidence and sustaining economic stability.

As significant exporters and importers, the BRICS nations play a crucial role in global trade flows. Their debt levels influence their ability to engage in international trade and manage fluctuations in commodity prices and currency exchange rates (WEF, 2023). Excessive external debt can pose systemic risks to the financial stability of these nations, potentially triggering economic downturns with far-reaching consequences. Newly joined countries like Ethiopia, Egypt, UAE, Saudi Arabia, and Iran add diversity in debt management, natural resources, and geopolitical issues. A multifaceted approach may help them mitigate some of their problems. Sustainable debt management is imperative for the BRICS countries’ long-term financial stability and development. Balancing the need for financing with prudent fiscal policies is essential for avoiding debt distress and fostering sustainable growth (IMF, 2022).

External debt often has geopolitical implications, as the BRICS nations borrow from various bilateral and multilateral sources. Analyzing the terms and conditions of these loans provides insights into geopolitical alliances and power dynamics (Dougherty & Biase, 2021). Investments funded by external debt play a pivotal role in infrastructure development, enhancing competitiveness and fostering economic diversification. However, the effectiveness of these investments depends on their alignment with broader development objectives. The BRICS nations advocate the reforming of international financial institutions as these should reflect the evolving global economic landscape (WEF, 2023). Understanding their external debt dynamics is integral to addressing disparities in global governance and promoting a more inclusive financial architecture (IMF, 2022).

In the BRICS economies, a significant push for development originates from government-led investments. Even so, the average debt-to-GDP ratio of BRICS was 70.35% in 2020 (RBI, 2021), with Brazil having the highest debt obligation at nearly 100%, followed by India (89.6%), South Africa (69.5%), China (66.8%), and Russia (19.3%). Mismanagement of public debt in BRICS could have larger repercussions for the world economy (RBI, 2021).

Our research aims to examine the linkage between external debt and economic growth in the BRICS bloc over 26 years from 1994 to 2020. This study adds to contemporary literature by focusing on panel data from five major developing countries, whereas previous studies have primarily examined advanced economies like the United States. This research provides significant insights into how the newly joined BRICS members manage fiscal constraints in the context of economic integration. It aims to contribute to the existing literature on external debt management and provide insights by highlighting the usefulness of economic integration.

However, this study is limited in its objective as it focuses on the external debt of the BRICS nations, not the domestic debt. Both types of debt are essential and complementary to each other. These countries face significant public debt burdens, for example, 81% in India and 92.78% in Egypt. Future studies should integrate both types of debt to develop more comprehensive solutions for debt-related problems of these economies. The remaining sections of this study are structured as follows: A literature review is presented in section II, followed by explanation of methodology in section III. Data analysis and findings are discussed in section IV. The final section V contains the conclusion and policy implications.

The literature on the impact of external debt on economic factors identifies three main channels through which external debt affects an economy: Debt Overhang, Liquidity Constraints, and Uncertainty Effects (Soydan & Bedir, 2015). The Debt Overhang Hypothesis suggests that increased external debt negatively affects physical capital investment, human capital investment, technological acquisition, and macroeconomic reforms (Claessens et al., 1996a, 1996b; Clements et al., 2003). High external debt puts pressure on the future fiscal space due to rising debt servicing and repayment obligations, which often leads to higher taxes, new levies, or austerity measures (Cohen, 1993; Claessens et al., 1996a, 1996b; Fosu, 1996; Pattillo et al., 2002, 2004; Clements et al., 2003; Arnone et al., 2005). Increased taxes reduce consumption, affecting overall demand, producer revenue, employment, capital investments, household income, and tax collections (Auerbach, 1997). Austerity measures also reduce spending on education and healthcare (Stuckler et al., 2017).

Increases in external debt also lead to volatility in future resource inflows and debt repayments, affecting macroeconomic stability. Higher debt levels lower the country’s credit rating, which in turn raises borrowing costs, crowds out private investment and reduces household incomes, increasing poverty and worsening health indicators (Soydan & Bedir, 2015; Barro, 1979; Fawzy, 2002). Economic downturns caused by high debt levels disproportionately affect women, worsening gender equity imbalances (Marshall, 1985).

Financing fiscal deficits through domestic or external borrowing significantly impacts economic growth. Fiscal deficits are often used to stimulate economic activity during downturns (Amassoma, 2011; Khan et al., 2019). Budget deficits can have adverse effects in the short term but may have positive effects in the subsequent year. Expansionary fiscal policies promote growth in sluggish economies (Tanaka, 2022; Arjomand et al., 2017; Istiqomah & Mafruhah, 2022).

Empirical evidence consistently shows that while some level of borrowing can be beneficial, excessive external debt significantly hampers economic growth and stability. For instance, Kibona and Kima (2024) have found that external debt negatively impacts financial development in Africa. San and Chin (2023) show that government debt affects economic growth differently across developed and developing countries. In Sub-Saharan African countries, Agyeman et al. (2022) found that limited capital exacerbated the negative impact of external debt on economic growth. Augustine and Rafi (2023) observed significant variability in debt levels in emerging economies, with rising debt often exceeding permissible limits and hindering improvement.

Studies like those by Mencinger et al. (2015) in OECD countries demonstrate that low public debt levels positively impact growth, but high debt levels (above 90-94%) negatively impact it. Katsikas et al. (2023) found that in euro-area countries, debt instability begins to affect solvency when borrowing costs exceed 3.29%. In India, Singh and Kumar (2022) conclude that domestic debt positively impacts long-term growth, while external debt servicing hinders it. Overall, the consensus is that excessive external debt negatively affects economic performance, and managing debt effectively is crucial for sustaining economic growth and stability.

Governments globally resort to internal and external borrowing to consistently subsidize their monetary shortfalls. Global systemic risks like natural disasters, financial crises, sovereign debt defaults, health emergencies, and geopolitical tensions have marred the last three decades. These threats have strained public revenues, leading to a reliance on external borrowings to meet the rising demand for energy, food, healthcare, and infrastructure. Governments worldwide relied on substantial bailouts and financial stimulus packages to spur consumption and boost private investment. Extensive government debt-seeking programs drove the fiscal deficits.

Research work by Yashina et al. (2015) found a close association between a nation’s debt and economic development, emphasizing that effective debt management is more important for economic growth than the size of the debt. Noga et al. (2018) demonstrated that low public debt levels did not necessarily translate into better economic development. Similarly, Wang et al. (2021) acknowledged that there was a negative association between outer obligation commitment and human improvement in BRICS countries from 1990 to 2016.

A study by Fosu (1996) concluded that countries facing tight fiscal space due to high debt servicing commitments tended to have a poor productive investment mix. High external debt servicing often leads to reckless investment decisions focused on quick returns rather than long-term investments that enhance the country’s productive capacity. Additionally, high-debt servicing compromises productive investments, requiring costly imported materials for economic growth. These factors influence investment mix decisions, disrupting productive capacity and reducing economic growth. Under the “vulnerability” channel, an increase in external debt often triggers volatility in future resource inflows and debt repayments, directly affecting the country’s macroeconomic stability. When the Government becomes more indebted, its credit rating is downgraded, leading to higher costs of external debt (Soydan & Bedir, 2015).

Unreasonably high cost of capital crowds out private investment (Barro, 1979), reducing the number of people able to secure decent jobs (Fawzy, 2002). This withdrawal in average household incomes directly impacts poverty ratios and key healthcare pointers such as infant mortality rate, life expectancy, and death rate. These deteriorating economic conditions disproportionately affect women, further exacerbating gender equity imbalances (Marshall, 1985). The decision to fund the fiscal deficit through domestic or foreign borrowing can significantly impact economic growth (Amassoma, 2011). As measured by GDP, economic growth is a crucial channel that can directly affect a country’s Human Development profile (Khan et al., 2019). Several studies demonstrate the link between economic growth and socio-economic indicators such as poverty, HDI, income levels, wealth inequality, life expectancy, and employment (Rawski, 1979; Muinelo-Gallo & Roca-Sagalés, 2011; Agrawal, 2007; Mahyar, 2016; Khan et al., 2019).

According to the pump-priming hypothesis, the Government’s budgetary deficit is anticipated to fund overall economic activity and avert a profound recession. Generating job avenues through government policies to back its deficit can raise aggregate demand and spending power. Business tycoons will be motivated to increase production accordingly. Public spending programs could also result in increased overall demand. Keynesian economists argue that citizens perceive a rising trend in their after-tax income due to the Government’s budget deficit approach, reinforced by tax reductions. Increased expenditure will raise the demand for goods and services, boosting pecuniary activity (Istiqomah & Mafruhah, 2022).

Although much research has been done on the macroeconomic effect of outside obligation, understanding its impact on financial factors remains to be expanded. Ayoub et al. (2024) have found that in the long haul, outer obligation emphatically influences joblessness and the future while adversely affecting the net national income. These findings are consistent in the short run, except for unemployment, which decreases with an increase in external debt.

External debt is a challenging issue (Allen, 2013). The allure of easy money traps the Government, leading to debt exceeding sustainable levels. This results in the country’s weaknesses such as decelerating economic growth (Davydenko et al., 2023) or even catastrophes (Reinhart & Rogoff, 2010). A study using data from 1946-2009 found that if external debt exceeded 90% of GDP, the growth rate decreased. Alternately, the connection between external debt obligation and development weakens when foreign debt diminishes. Herndon et al. (2013) contend that the impact of such liability on economic progress remains the same above or below any threshold value in their study of the same period. They examined balanced panel data from 1980 to 2017 for 80 developing countries to explore evidence of debt overhang and liquidity effects on growth. Controlling for various factors affecting growth, they found evidence of debt overhang effects in emerging nations. When the ratio of external debt to GDP exceeds 55%, the impact on growth becomes negative and statistically significant. Using a fixed effects panel threshold model, they revealed that such a negative association is more noticeable in upper-middle-income developing countries: high debt levels slow growth when the debt-to-GDP ratio surpasses certain thresholds.

Debt Obligation commitments gathered yearly make it progressively challenging for the public authority to avoid obligation bondage because of internal and external factors. As expenditures rise and incomes decline, the monetary shortage causes a bleak financial standpoint. The movement of obligation accentuates future ramifications. Carney et al. (2014) referred to a joke from Herbert Hoover: “Favoured are the youthful, for they will acquire the public obligation.” There is a worry that the current generation is making debt obligation troubles for what is to come. Edi Harsono, Andi Kusumawati, and Nirwana (2024) analyzed the determinants of outside debt obligation and examined methodologies for overseeing it, considering factors like inflation rate, exchange rate, interest rate, exchange receptiveness, and institutional quality. Their review utilized regression analysis to investigate the association between institutional quality and macroeconomic markers on external obligation. They chose 52 examples from five ASEAN agricultural nations from 2008 to 2019, finding that inflation, loan fees, and institutional quality adversely influenced outer obligation, unlike exchange rate and exchange receptiveness.

Isubalew Daba, Avana, Wondaferahu Mulgeta Demissie, and Atnafu Gebremeskel Sore (2023) analyzed the connection between external debt obligation and monetary improvement in Sub-Saharan African Countries. Their review evaluated the present moment and long-haul effects of outside obligation on the financial development of 39 SSA nations somewhere in the range of 2011 and 2021, presuming that an expansion in outer obligation is linked to a 0.034% deterioration in real GDP in the short run and a 0.65% drop over the long term. The unfavourable impacts were more articulated than others.

Earlier studies have primarily concentrated on the impact of various channels of external debt on the economic development of a country, as well as the relationship between debt and growth. However, research has not examined the relationship between external debt and economic growth in the context of integration for the BRICS countries. Furthermore, the potential role of integration in addressing debt-related challenges still needs to be explored. This study aims to fill this research gap by investigating how economic integration can influence the relationship between external debt and economic growth in the BRICS countries and how it can help them solve debt-related problems.

Researchers often conduct diagnostic tests to ensure the validity of the PMG results, such as testing for residual autocorrelation and heteroskedasticity. PMG estimation offers a flexible and powerful approach to analyzing panel data by capturing individual entity dynamics and common long-run relationships. Before estimating the model, we checked the panel's cross-sectional dependence in the study. The results are presented in Table 1.

Both the Pesaran and Friedman tests indicate the existence of cross-sectional dependence in the panel data of the BRICS countries. These findings suggest that the variables under consideration are not independent across cross-sections, emphasizing the need to account for such dependence in further analysis and modeling.

The descriptive statistics (table 2) provide insights into the central tendency, variability, and distributional characteristics of the variables “lrg,” “ldser,” and “ldsgni.” The evidence suggests the data are normal except for the variable lrg.

To study further, we looked into the second generational unit root test of Pesaran for the variables included in the model:

The Pesaran CADF (Cross-Sectionally Augmented Dickey-Fuller) test is a method used to examine whether the variables are stationary, particularly when cross-sectional dependence is observed in the data. The “Z[t-bar]” are the test statistics, which show how many standard deviations the observed test statistic is from the mean under the null hypothesis of non-stationarity. The values in parentheses represent the p-values associated with each test statistic. For the first variable (“lrg”), the test statistic is –4.512 with a p-value of approximately 0.000, indicating strong evidence against non-stationarity. For the differenced series of the first variable (“d.lrg”), the test statistic is –1.396 with a p-value of approximately 0.081, suggesting weaker evidence against non-stationarity (but still significant at conventional levels). Similarly, the test statistics are statistically significant for the other variables, their differenced series. With these results, we have decided to use the PMG model based on the panel ARDL model.

In addition to the above tests, the study conducted endogeneity tests using the Durbin-Wu-Hausman, and Wooldridge tests for autocorrelation. The results are presented in the following tables:

For both the Durbin (score) test and the Wu-Hausman test, the null hypothesis is that the factors in the model are exogenous, meaning they do not correspond with the error term. The p-values for the two tests are moderately high (0.5686 and 0.5764, separately), demonstrating inadequate proof to dismiss the null hypothesis. In this way, in light of these tests, there is no sign of endogeneity among the factors in the model.

The Wooldridge test for autocorrelation evaluates whether first-order autocorrelation exists in the model’s residuals. The hypothesis is that there is no first-order autocorrelation in the data. With a p-worth of 0.2845, the evidence is for no first-order autocorrelation. In light of these endogeneity and autocorrelation test results, there is no proof to propose that the factors in the model are endogenous or that there is first-order autocorrelation.

The study reveals a negative relationship between external debt stocks and economic growth for the BRICS countries, in line with other studies (Wang et al., 2021; Kibona & Kima, 2024). In individual countries, the importance and extent of this relationship tends to differ. Brazil and Russia demonstrate a significant negative relationship between debt stock to GNI proportion and economic growth. India shows an insignificant negative relationship between the obligation stock to GNI proportion and economic growth, proposing a comparative example with less measurable importance. In China and South Africa no significant connections between debt obligation and economic growth are observed, indicating that different variables might influence monetary performance in varying degrees. Below, we present the policy implications based partly on empirical evidence and the country’s experiences-related documentary evidence: