An Analysis of the Link Between Public Debt and Economic Growth: Case for East Africa Community States.

Abstract

East Africa Community region was among the regions ranked as experiencing rapid growth in Africa compared to Sub-Saharan Africa. To realize these growths, domestic revenues alone are not sufficient and thus governments on the path of bridging a deficit bridge the revenue gap through borrowing. This paper therefore investigates the impact of public debt on economic growth rate of EAC member states and secondly, to establish the causality between public debt and growth in East African Community countries. Apart from public debt, the study also included the following variables to control or moderate the model; Debt Service, Gross Capital formation, Labor Force Participation Rate, Inflation Rate and Trade to GDP Ratio. The study tested significance of the variables at one percent, five percent and ten percent levels of significance. The study employed GLS random effects model based on Hausman specification test. From the study results, public debt had a negative but insignificant impact on the economic growth in East African Community considering the suggested levels of significance. On causality, the study tested for the causal relationship between economic growth and public debt. The study also indicated that there was no causal relationship established among the countries under study except Rwanda that indicated a unidirectional relationship such that public debt significantly caused economic growth. With regard to economic growth in East Africa, policy on public debt my not in any way be a remedy to economic growth challenges. Secondly, the fact that only Rwanda as country demonstrated a unidirectional causality, most of EAC member countries never had either direct or reverse causality implying that neither public Debt nor economic growth causes the other but the third variable. We cannot conclusively state that increased public debt can result into reduced growth and low growth can result into increased borrowing. Therefore, the insignificant effect may imply that perhaps the respective governments can consider other triggers of economic growth. For instance reviewing debt policy, increasing capital investments, implementation of policies that will enhance increased opportunities in the labour market for the young population in the region and even control the macroeconomic environment that affects inflation. Policy makers and the relevant stakeholders should therefore consider re-examining their monetary and fiscal policies public policies to promote manageable inflation levels, which will promote both local and international investments.