Abstract

This paper examines the paradox of debt overhang in the Heavily Indebted Poor Countries (HIPC) of the Southern African Development Community (SADC). The purpose is to show debt overhang existence and the effect of debt relief (HIPC) on these countries. We used a combination of models to highlight the empirical evidence of the debt overhang theory in particular for SADC HIPC completion countries. Financial modeling was conducted to where a linear relationship was measured of debt indictors on economic output. A typical debt overhang model was adapted that was modified to show the effect of debt relief effects on both the economic output and private capital, eventually a causality test is done on economic output, private capital and debt service obligations using the Granger causality test. Results demonstrate that a significant relationship does exist between external debt and GDP.As external debt decreases it shows an increase in GDP. Also as countries in the region attain HIPC completion it greatly increases GDP, assumed to be due to a decrease in debt service obligations. Terms of trade significantly affects the private capital. As government capital expenditure decreases it shows an increase in private capital that can be used in investment and economic development within these countries. Debt service does not have any direct effect on GDP or private capital unless via forms of macroeconomic variables like debt. In conclusion debt overhang is still a paradox that may exist but debt relief plays a major role in GDP growth for these countries.

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