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American Journal of  Economics and 
Business Innovation (AJEBI)

Does External Debt Stocks Have an Asymmetric Effect on Inflation 
Dynamics in Cameroon? An Application of  Nonlinear ARDL

Enongene Betrand Ewane1*, Etape Felix Mejame2

Volume 2 Issue 2, Year 2023
ISSN: 2831-5588 (Online), 2832-4862 (Print)

DOI: https://doi.org/10.54536/ajebi.v2i2.1396
https://journals.e-palli.com/home/index.php/ajebi

Article Information ABSTRACT

Received: March 16, 2023

Accepted: April 27, 2023

Published: May 01, 2023

External debt is indispensable, especially in developing countries which usually face budget 
deficits to cover up their saving-investment gap. However, the effect of  external debt 
on inflation depends on whether it is increasing or decreasing. Hence, this study aims 
to examine the effect of  external debt stocks on inflation using World Bank data from 
1980 to 2020 in Cameroon. The study makes use of  non-linear ARDL to examine the 
positive and negative changes in external debt stocks and their effects on inflation. The 
results indicate a long-run increasing and decreasing asymmetry effect of  external debts 
on inflation. Only the coefficient of  positive external debt stock on inflation is positive 
and significant in the long run while in the short run, positive and negative external debt 
stocks respectively have a negative and positive significant impact on inflation. The study 
recommends that the government should be mindful of  increasing external debt as it will 
become inflationary in the long run.

Keywords
Asymmetry Effect, Cameroon, 
External Debt, Inflation 

1  Department of  Economics, University of  Buea, Cameroon
2 Department of  Economics and Management Sciences, University of  Dschang, Cameroon
* Corresponding author’s e-mail: betrandenongene@yahoo.com

INTRODUCTION
Most developing countries face the problem of  
mismanagement of  resources due to corruption and 
embezzlement. This increased their budget deficit which 
result to external borrowing to cover up their savings-
investment gap. Hence, external financing is primordial 
to facilitate investment in poor countries that usually face 
a budget deficit. The government borrows principal to 
increase welfare and stimulate growth which is either 
through taxation, seignorage, or debt (Ngangnchi & 
Joefendeh, 2021). However, failing to effectively utilize 
borrowed money increase the external debt stock of  a 
country which results to inflationary pressure(Kwon 
et al., 2006a; Sims, 2016). Excessively borrowing by 
countries may also result in debt repayment difficulties 
which makes further borrowing difficult. The repayment 
of  these debts is highly determined by exchange rate 
fluctuation in the forex market, which may increase 
the cost of  paying the debt through inflation. This has 
made monetary authorities and policymakers increasingly 
worried over the effect of  inflation pressure due to 
exchange rate appreciation and public debt (Philip and 
Oseni, 2012). 
The nexus has been a subject of  concern over time with 
heterogeneous conclusions among researchers(Aimola 
& Odhiambo, 2021). The monetarist believes inflation 
is a monetary phenomenon arguing that price level 
and real output may increase in the short run due to an 
expansionary monetary policy but only the price level may 
increase in the long run (Friedman, 1968). However, other 
studies have proven that inflation is no longer a monetary 
phenomenon but a fiscal policy problem (Lin & Chu, 2013; 
Nastansky & Strohe, 2015). In LDCs, high inflation, debt 
stocks, and poor economic performance are predominant 
due to fiscal deficit(Islam & Wetzel, 1991).

In Cameroon in particular, external debt has been growing 
at an alarming rate coupled with a very weak exchange 
rate currency. According to the magazine Business in 
Cameroon, Cameroon’s public debt was estimated at 
CFA12,374 billion in September 2022, 11% higher than 
in the same period of  2021 which represents almost half  
the country’s GDP (45.8%)(S.A, 2022). In addition, the 
appreciation of  US dollar value makes Cameroon incur 
an extra cost of  3 billion CFA to finance its external debt 
in July 2022(Aboudi, 2022).
The World Bank data for Cameroon indicate that total 
external debt has been rising from 2011 onward (see 
Figure 1). Hence, Cameroon is at high risk of  external 
and overall public debt distress as the value of  public 
debt-to-GDP ratio is above the benchmark(Vivek et 
al., 2022). Even with the debt relief  program of  HIPC 
(heavily indebted poor countries) and MDRI (Multilateral 
Debt Relief  Initiatives) to strip Cameroon off  its debts, 
external debt has still been steadily rising (see figure 1). In 
fact, since 2010, total external plus domestic public debt 
augment to 35.2 % of  GDP in 2016, doubling the median 
for SSA countries between 2009 to 2015 (Ngangnchi & 
Joefendeh, 2021). The World Bank statistics indicate that 
Cameroon’s external debt as a percentage of  GNI has 
increased from 24.4%, 27.8%, 33.1%, and 34.7% in 2017, 
2018, 2019, and 2020 respectively.
This has also caused a continuous rise in inflation 
through rising prices (see Figure 2). These extreme levels 
of  external debt hinders economies ability to invest as 
their limited income is used in debt servicing leading 
to a vicious cycle of  debt and exposing the country to 
exchange rate risk. Atique & Kamran (2012) indicates 
that numerous poor countries become even more poorer 
after borrowing externally from World Bank, IMF, and 
Paris Club.  This increasing deficit financing may worsen 

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inflation leading to political pressure (Veronique & Jack, 
2022). This excess debt further affects interest rates, 
which may crowd out private sector investments leading 
to lower productivity and low wages. External debt can 
have nonlinear impacts on inflation where a low level 
of  indebtedness causes inflation to be low while a high 
level of  indebtedness causes high inflation. Hence, the 
study aims to examine the positive and negative changes 
in external debt stocks and their effect on inflation in 
Cameroon. No study exists in Cameroon context that 
specifically examines the asymmetric relationship between 
external debt and inflation. Thus, this study fills the gap 
by providing answers on non-linearity in the external debt 
inflation nexus. The study is paramount as Cameroon is 
yet to establish a stable inflation rate. 

argues that monetary authorities have control over price. 
Hence, for the government to contain its budget deficit, 
she must keep printing money and utilize the surplus 
budget to pay the debt.
The fiscal theory of  price level (FTPL)  which looks at the 
nexus between fiscal policy, public debt, and inflation also 
explains that it is not only money supply that determines 
inflation but inflation is influenced by other factors 
such as fiscal deficits and the debt(Farmer & Zabczyk, 
2019). The theory claims that if  the government has 
an unsustainable fiscal policy, then it will pay them 
off  by inflating the debt away. The theory stipulates 
that the price level is determined by government debt. 
Hence, inflation breaks out when people don’t expect 
the government to fully repay its debts(Bassetto, 2008). 
This theory is of  relevance to developing countries like 
Cameroon as they lack the fiscal capacity to mobilize 
fiscal revenue giving rise to interest rates, higher taxes, and 
inflation. Keynes also argues that inflation is “a method 
of  taxation” that the government uses to protect the use 
of  real resources”(Keynes, 1971). Friedman proposed a 
fixed monetary rule where “the Fed should be required 
to target the growth rate of  money to equal the growth 
rate of  real GDP for price to remain unchanged” (Jahan 
& Papageorgiou, 2014).

Empirical literature review
Studies on the effect of  external debt on inflation are 
inconclusive. The heterogeneity is based on case studies, 
estimation procedures, and the use of  variables (Aimola 
& Odhiambo, 2021). However, many empirical studies 
have established a positive relationship between both 
terms. Mweni et al (2016) examine the effect of  external 
debt on inflation in Kenya from 1972 to 2012. Regression 
results indicates that external debt have a positive 
and significant effect on inflation. Similarly, Baxter & 
Stockman (2011) indicates that an increase in the supply 
of  money often leads to the upward price movement of  
goods and services. Likewise, Nguyen (2015) used PMG 
estimation and different GMM to investigate the effect 
of  public debt on inflation in 15 less developed Asian 
countries for 22 years. 
The study found public debt to have a positive and 
significant effect on inflation for GMM estimates while 
PMG estimation indicated that public debt is deflationary 
in the short run but inflationary in the long run. Equally, 
Heba (2021) found that external debt elevates prices 
both in the short and long runs in Egypt. His findings 
are consistent with that of  Aisen, & Veiga (2006) who 
conclude that external finance deficit increases both 
inflation and interest rates. Also, Ekinci (2016) using 
simple linear regression conclude that a strong positive 
nexus exists between the consumer price index and 
external debt in Turkey from 2003 to 2015. Similarly, 
Mweni et al (2016) indicates that rising inflation rate 
increases the level of  external debt in Kenya using OLS 
from 1972 to 2012. Their findings are contrary to that of   
Assibey-Yeboah & Mohsin (2014) who concluded that 

Figure 1: Cameroon total external debt
Source: Computed by authors from WDI

Figure 1: Consumer price index (CPI)
Source: Computed by authors from WDI, 2022

LITERATURE REVIEW
Theoretical literature
The most widely accepted theory of  inflation is that 
inflation is a monetary phenomenon(Friedman, 1968). 
Friedman advocates that an expansionary monetary policy 
will increase both real output and the general price level 
in the short run but only the price level would increase 
in the long run (Aimola & Odhiambo, 2020). The theory 

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external debt decrease when the inflation rate increase. 
Helmy (2021) using Egypt as a case study concludes that 
in the short run and long run, external debt deteriorates 
inflation. Similarly, Boshra (2023) indicates that in both 
the short and long run, inflation has a decreasing impact 
on external debt. Gathendu (2021) using the VECM in 
Kenya, Uganda, and Tanzania for 30 years found that 
external debt has a positive effect on inflation in the long 
run. He further indicates a unidirectional relationship 
between both terms. Lopes Da Veiga et al (2016) using 52 
African from 1950 to 2012 reveals a positive link between 
high levels of  public debt with inflation. Their finding 
is consistent with that of  Afonso & Ibraimo (2018) 
who established a positive link between public debt and 
inflation in Mozambique using VAR. These findings are 
true with that of   Lopes Da Veiga et al (2016) who further 
confirm that developing countries with high public debt 
witness a high rate of  inflation. 
In a related study, Reinhart & Rogoff  (2010) revealed 
that rising public debt levels lead to higher inflation for 
emerging market economies. Romero & Marin (2017) 
using 52 countries from 1961 to 2015 indicates that for 
countries that have already experienced high public debt, a 
further increase in public debt will coincide with inflation. 
Kwon et al (2006) noted that rising public debt aggravates 
inflation for indebted developing countries but it weakly 
leads to inflation for non-indebted developing countries 
while it is absent in developed countries. Sunder-
Plassmann (2020) investigate the link between sovereign 
debt, default, and inflation. The results reveal that 
increasing nominal foreign debt leads to inflation while 
domestic debt is less inflationary. In addition, Aimola & 
Odhiambo (2022) using a NARDL for 41 years, indicate 
that total public debt and inflation have an asymmetric 
relationship in the Gambia. 
Other empirical investigations have found a negative 
relationship between external debt and inflation (Essien 
et al., 2016; Karakaplan, 2009; Taghavi, 2000; Wheeler, 
1999). Karakaplan (2009) Support the hypothesis that for 
countries with well-developed financial market, external 
debt have less impact on inflation. Arisa (2020)  using a 
SVAR method in Kenya from 1993 to 2018 indicates that 
changes in the external debt negatively affect inflation. El 
Aboundi & Khanchaoui (2021) reveals that low inflation 
makes debt repayment difficult in Morocco. 
Other authors find evidence of  threshold limit. 
Dumitrescu et al (2022) using 22 emerging nations 
examine the nonlinear effect of  government debt on 
inflation. They conclude that shadow economy whose 
GDP exceeds 24.3% experience high costs of  inflation 
while low shadow economy can accommodate increases 
in public debt without any cost associated with inflation. 
Reinhart & Rogoff  (2009) indicates that when nations 
move from a lower debt ratio to a higher debt ratio, they 
suffer a median inflation rise from 6% to 16.5% per year. 
A study found an insignificant relationship between 
external debt and inflation. Aimola & Odhiambo (2021) 
found that the impact of  public debt on inflation is 

statistically insignificant in both the short and long run in 
Nigeria from 1983–2018. 

DATA AND METHODOLOGY
The study makes use of  time series data from WDI 
spanning from 1980 to 2020. External debt, which is 
the dependent variable is measured in total external 
debt stock in dollars while inflation is measured by the 
consumer price index. Real exchange rate, trade openness, 
and domestic investment are control variables.
The study uses the nonlinear  ARDL to explore the 
increasing and decreasing effect of  external debt on 
inflations. The standard ARDL captures only the linear 
or symmetric relationship between variables but not 
nonlinear or asymmetric linkage (Shin et al., 2014). 
Hence, the standard ARDL is extended to incorporate 
the nonlinear dynamics amongst variables but maintain all 
the qualities of  the conventional ARDL. The idea behind 
this model is to understand the effect of  increasing or 
decreasing the regressors on the dependent variable. To 
investigate if  external debt have a nonlinear relationship 
with inflations in Cameroon, the study adopts the 
NARDL of  Shin et al (2014).
The general specification on NARDL is given as follows;

Where b1 EDT
+ and b2 EDT

- are the partial sum of  
positive and negative changes in total external debt which 
is derived as follows

With the inclusion of  all variables, the NARDL looks 
thus;

Where; ED= external debt: RER= real exchange 
rate: TO= trade openness: DI= domestic investment,  
μ1t=white noise error term; ∇ = The difference operator; 
b1-b6 are shortrun coefficient while b7-b12 are longrun 
coefficient; p is the optimal lag length; b0 is the constant; 
b2i

+ and b3i
-  are the short-run asymmetric coefficients 

while b8
+ and b9

- capture the longrun asymmetric 
coefficient.
To ascertain the long run relationship in nonlinear or 
asymmetric ARDL, cointegration is primordial. Pesaran 
et al (2001) computed F-statistics is compared with the 
computed upper critical bound. The technic test the 
null hypothesis of  no cointegration (Ho: b7i=b8

+=b9
-

=b10i=b10i=b11i=b12i=0 against the alternatives of  
cointegration (Ho:b7i ≠b8

+ ≠b9
- ≠b10i≠ b10i ≠b11i≠b12i≠0). 

Once the computed F-statistic is greater than the critical 
values for the upper bound, cointegration is evidence.
To determine if  long or short run asymmetry relationship 

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exists between inflation and external debt, the Walt test is 
used which tests the null hypothesis of  short run or long-
run symmetry against the alternative hypothesis of  short 
run or long-run asymmetry(Aimola & Odhiambo, 2022).
The long run representation of  the ECM in the nonlinear 
equation 5 is given as follows;

Where ECTt-1 is the one-period lagged error correction 
term. The coefficient 𝜆 is the speed of  adjustment and 
it must be significant and negative to show long run 
convergence.

RESULTS AND DISCUSSION
Unit root and cointegration test
Determining stationarity is vital to avoid spurious 
regression(Gujarati, 2004). This is also to make sure 
none of  the variables are integrated of  order two. The 

DFGLS of  Elliott et al (1996) and Phillip Perron  unit  
root test of  Phillips & Perron (1988) are used to account 
for the presents of  unit root. The results in Table 1 below 
reveals a mixed order of  integration. However, these 
conventional unit root tests are usually weak in cases of  
structural breaks. Hence, the Zivot-Andrew unit root test 
which accounts for a single break point is also applied in 
this study(Andrews & Zivot, 1992). The results in Table 
2 also reveals a mixed order of  integration confirming 
the traditional unit root test. In all cases, the test statistics 
must be greater than the 5% critical value to affirm 
stationarity either at levels or first differences as indicated 
in both tables. This warrant the application of  nonlinear 
ARDL applied in conditions of  I(1)  and I(0). 
The results of  the NARDL bounds test for cointegration 
in Table 3 indicates cointegration amongst the variables 
even at a 1% significant level. The calculated F-statistic 
of  the NARDL bound test is greater than the upper 
bound at all critical values. Thus, the short and longrun 
relationship can be determined in the study.

Table 1: DFGLS and PP Unit root test
Test Variables Test statistics at levels Test statistics at first difference Decision

With trend With no trend With trend With no trend
DFGLS INFLA -4.127 -2.89 ---- ---- I(0)

logED -1.648 -1.026 -2.661 -2.659 I(1)
EXR -2.131 -1.263 -4.353 -3.581 I(1)
TO -4.055 -2.29 ---- ---- I(0)
logINV -1.359 1.164 -4.234 -3.585 I(1)

PP INFLA -6.181 -5.768 ---- ---- I(0)
logED -1.588 -1.514 3.478 -3.528 I(1)
EXR -2.08 -1.579 -5.464 -5.543 I(1)
TO -6.184 -5.403 ---- ---- I(0)
logINV -2.414 -0.758 -7.22 -7.295 I(1)

Note: Test statistics @ 5% CV for no trend= -3.190 and -1.950 for trend for DFGLS
Test statistics @ 5% CV for no trend= -2.961 and -3.544 for trend for PP
Source: Computed by authors

The NARDL result presented in Table 4 above reveals the 
positive and negative short run and long run external debt 
stocks on inflations. The result of  the positive external 
debt stocks on inflation is positive and significant in the 
longrun revealing that an increase in external debt stocks 
will increase inflations in the longrun. This finding is true 
with that of   Mweni et al (2016) in Kenya. Also, positive 
and negative external debt stocks have a negative and 
positive impact on inflation in the shortrun respectively. 

Hence, an increase in external debt stocks will decrease 
inflation while a decrease will increase inflation in the 
shortrun. A negative exchange rate has a negative and 
significant effect on inflation in the longrun. That is a 
fall in the exchange rate will decrease inflations in the 
longrun but both the negative and positive exchange 
rates were insignificant in the shortrun. In addition, both 
positive and negative trade openness has a positive and 
significant effect on inflation in the longrun indicating 

Table 2: Zivot-Andrew unit root test
Variables Test statistics at levels Test statistics at first difference Break date Decision

Break in trend Break in intercept Break in trend Break in intercept
INFLA -6.202 -6.823 --- --- 1987 I(0)
logED -2.149 -4.609 -4.456 -4.68 2014 I(1)
EXR -2.247 -5.269 --- --- 1999 I(0)
TO -6.272 -6.569 --- --- 1987 I(0)
logINV -2.149 -4.609 -4.456 -4.609 1997 I(1)
Note: Test statistics @ 5% CV for break in intercept= -4.80 and -4.42 for break in trend 
Source: Computed by authors

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that an increase or decrease in trade openness increases 
inflation in the longrun while only positive trade openness 
has a positive and significant impact on inflation in the 
short run. Lastly, only negative domestic investment has a 
positive and significant impact on inflation in the longrun. 
However, it was significant but negative in the shortrun.
The result further indicates that the cointegration equation 
is negative and significant as expected. It indicates that 

the rate of  adjustment speed to long run equilibrium is 
38.9%. The R-square value of  0.9689 indicates that about 
96.9% of  variation in inflation is explained in the model 
while 3.1% is explained by error term.  The regression 
results are also of  good fit as indicated by the adjusted 
R-square of  90.1%. The F-statistic value is significant at 
1% suggesting the prediction of  the overall model is a 
good fit.

Table 3: NARDL bounds test for cointegration results
F-statistics=61.938 Lower bound Upper bound Conclusion
1% 3.74 5.06 Cointegration even at 1% 

significant level5% 2.86 4.01
10% 2.45 3.52
Source: Computed by authors

Table 4: Short and long run nonlinear ARDL estimates
variables coefficient Standard error p-values
Longrun regression coefficient
LogED_POS 0.077*** 0.086 0.001
logED_NEG -0.022 0.057 0.705
EXR _POS 0.002 0.007 0.73
Exr_NEG -0.025** 0.009 0.02
TO _POS 0.399*** 0.081 0
TO_NEG 0.404*** 0.081 0
LogDI_POS -0.101 0.166 0.556
LogDI_NEG 0.957* 0.521 0.091
constant 6.802*** 1.307 0
Model statistics
R-square 0.9689
Adj R-squared 0.9015
Prob (F-statistic) 0
F-statistic 14.37
Shortrun regression coefficient
ΔlogED_POS -9.297** 3.509 0.021
ΔlogED_NEG 4.041* 4.041 0.059
ΔEXR_POS 0.0031 0.003 0.764
ΔEXR_NEG -0.002 0.004 0.634
ΔTO_POS 0.307* 0.171 0.097
ΔTO_NEG 0.293 0.171 0.113
ΔlogDI _POS 0.059 0.11 0.604
ΔlogDI _NEG -0.447* 0.238 0.085
Cointegration. equation -0.389*** 0.074 0
Diagnostics Test 
Breusch-Godfrey LM test 0.3303
Portmanteau test 0.6204
Breusch/Pagan heteroskedasticity test 0.4011
ARCH test 0.7967
Ramsey RESET test 0.1747
Jarque-Bera test on normality 0.8267
Note: *** denotes 1 % significant level, ** 5%, and * 10%, Source: Computed by authors

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The diagnostic tests in Table 4 reveals that all post 
estimation test are insignificant. Hence, there is no 
autocorrelation, heteroscedasticity, no ARCH effect, 
misspecification error, and non-normality respectively. 
The model is also stable as indicated in appendix 3.
The Walt test results in Table 5 indicate a long run 
increasing and decreasing asymmetry effect of  external 

debts on inflation. The alternative hypothesis that the 
variables in the long run, are asymmetric is accepted. The 
positive and negative partial sums of  squares support an 
asymmetric relationship in the model. When the external 
debt increases, it decreases inflation by 23.15% but when 
external debt decreases, it increases inflation by 11.97%. 
No short run asymmetry effect was found to exist in the study. 

Table 5: Short-run and long-run asymmetry test
Walt test F-test p-values Decision
Long run asymmetry(+) 23.152 0.000 Positive long run asymmetry nexus exist
Long run asymmetry(-) 11.973 0.046 negative long run asymmetry nexus exist
Short run asymmetry 0.006145 0.938 Short run asymmetry nexus does not exist
Source: Computed by authors

CONCLUSION AND RECOMMENDATION
External debt is an unavoidable condition for countries 
with low financial strength to boost growth and 
development. However, external debt if  not properly 
managed can lead to budget deficit, inflationary pressure, 
and trap a country in the vicious circle of  debt financing. 
This study was out to examine the effect of  external 
debt stocks on inflations. To examine the increasing and 
decreasing impact of  external debt stocks on inflation, 
the study adopts the nonlinear ARDL approach. The 
results indicate a long-run increasing and decreasing 
asymmetry effect of  external debts on inflation. Only the 
coefficient of  positive external debt stocks on inflation 
is positive and significant in the long run while in the 
short run, a positive and negative external debt stocks 
both have a negative and significant impact on inflation. 
Based on this conclusion, the study recommends that 
the Cameroon government should initiate strategies to 
reduce its external debt stocks such as reproductive debt 
strategy, increase accountability in the use of  borrowed 
money, and debt refinancing. This will boost revenue with 
much lower taxes and decrease inflation.

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