Abstract: - The objective of this study is to offer an empirical valuation of the relationship between external

debt and economic growth in the Western Balkan (WB) countries, focusing specifically on the countries like

Albania, Kosovo and North Macedonia, combined with other WB countries like Bosnia and Herzegovina,

Montenegro and Serbia. The empirical model provides the impact of external debt and other control variables

like total investments, population growth, inflation, literacy ratio, trade openness on economic growth in the

Western Balkan countries, using a panel level data for 6 Western Balkan countries, covering a yearly time span:

2000-2022. Different estimation methodologies like Fixed Effects with Driscol and Kraay standard errors,

robust LSDV and GMM estimates, were employed for the purpose of the research. The findings of the research

confirm growth-deteriorating effect of external debt for target group of countries like Albania, Kosovo and

North Macedonia and growth enhancement effect of external debt for the second group of countries like Bosnia

19.

Received: August 8, 2021. Revised: June 7, 2022. Accepted: June 24, 2022. Published: July 25, 2022.

1 Introduction

The association between external debt and economic

growth is of essential importance for the Western

Balkan (WB hereafter) countries, once having

regard the general public debt limit that these

countries should impose for fulfilling economic

level of capital accumulation, due to different

problematic political and economic circumstances

the region went through in the near past, thus,

making these countries very much likely to finance

their investment needs at their early stage of

Furthermore, the relationship between external debt

and economic growth in terms of practical

institutional life is also crucial in the academic

debate. External debt has a catalyst impact on

investments; savings and capital inflow, implying

that foreign savings complement domestic savings,

thus, satisfying the investment demand, especially in

transition countries who face limited financial

resources for financing investment needs [18].

However, due to ‘’debt overhang’’

inflow to drop down, due to macroeconomic

instability, which on the other hand can utilize

further growth adverse effects [30; 26]. The

empirical evidence on growth deteriorating effect of

external debt advocates that countries with lack of

institutional efficiency are more likely to experience

growth adverse effects from the external debt, in

cases when external debt approaches to 15-30

percent of GDP [11] or is in the range of 20 percent

of GDP [13]. However, other studies suggest that

in a sample of the six WB countries, with a special

focus on the selected WB countries like Albania,

Kosovo and North Macedonia, using a panel

regression analysis, during the yearly period from

2000 to 2022

addressed in the study: What is the nature of the

impact of external debt in the two group of WB

of investments on growth, on the second cycle of the

economic activity. In this case, the cost of servicing the

public debt, via external debt can crowd out public

investment expenditures, thus, reducing the total

investments and complementing the private investments

three years moving average, covering in principle the

years of 2019, 2020 and 2021.

capital and investment opportunities at early stage

of development. Further one, in this section as

outlined in the following table, we show the results,

which confirm growth deteriorating and growth

enhancement effect of external debt and growth

neutral effect of external debt on economic growth,

through different channels.

Note: Summary papers with empirical studies.

As concern to the relationship between external debt

and economic growth, at panel level, some of the

studies, as presented on table 1, confirm growth-

enhancing effect of external debt, mainly driven by

public investment, financed by the debt component

[42]. In line with these findings, at country level, is

Note: Total external debt is the sum of public,

publicly guaranteed, and private nonguaranteed

long-term debt, use of IMF credit, and short-term

debt. GNI – Gross National Income (formerly GNP

– Gross National Product) is the sum of value added

by all resident producers plus any product taxes

(less subsidies) not included in the valuation of

output plus net receipts of primary income

(compensation of employees and property income)

from abroad.

with average recorded external debt in terms of

Gross National Income by 144.03 and 171.32

percent, respectively, and followed by North

Macedonia and Serbia. Among the WB countries,

the lowest debt level sourced from external sources

was recorded in Kosovo, which is an example of

country, being less likely to finance the economic

activities from foreign sources.

stationary trend of the data, and therefore avoid

spurious regression and incorrect inferences. We

employee panel unit root test, to allow for fixed

effects and unit specific time trends, since their test

includes a degree of heterogeneity [32]

hypotheses are , where      and  

control variables,  is the regional dummy

WB countries, like Bosnia and Herzegovina,

study is to differentiate the impact of external debt

to augment the regression model of the growth equation,

which explain the variation of growth level of the WB

countries that may affect the relationship between growth

and external debt.