Effect of Debt on Economic Growth of East African Region

Abstract

This research study established the effect of debt on economic growth of East African region in view of an upsurge in the level of debts in many countries on the African continent. In order to achieve the research objectives, a methodology framework of panel autoregressive distributed-lag (Panel ARDL) was undertaken. The study answered the following research questions: What is the effect of multilateral institutions debts on economic growth in East African region? What is the effect of debts from development financial institutions on the economic growth of East African region? What is the effect of internal debts on the economic growth of East African region? For research purposes the study employed descriptive research design. Several econometrics methods: pooled mean group, mean group, dynamic fixed effects and also allow for common correlated effects. The study focused on East African region and relied on secondary data obtained from the World Bank website, ADI and WDI website. A checklist developed based on the research questions of the study was used to collect data on the values of the variables in the corresponding period under study for each country under consideration. The time series data covered 2000-2020. The data was organized through excel and later imported to E-views 12 software for analysis. Regression, descriptive statistics and analytic statistical methods were employed in the analytical process and results presented in tables, graphs and figures for clarity and ease of understanding. The study findings reveal that the variables internal debt and debt from development financial institutions have a significant impact on economic growth while multilateral debt were insignificant. Moreover, all the variables multilateral debt and internal debt were found to have a negative relationship with economic growth of the East Africa region while debts from development financial institutions were found to have a positive relationship with economic growth of East African region countries. The study suggested the need of respective East African region's governments to establish and adopt an optimal balance between multilateral debt, debts from DFIs and domestic debt to maintain steady economic growth. With domestic debt having a negative significant effect on GDP growth is an indication of a crowding-out effect thus a need to strike a balance on the optimal domestic borrowing that would not negatively affect private investments in the East African region