The Relationship Between Stock Market Performance and Economic Growth in the East Africa Community

Abstract

The stock market has been connected to the economic development and growth over the obligation as the main sources of new capital. While, economic development might be the facilitator for stock market development, the stock markets are viewed as enhancing the economic growth through capital allocation and liquidity provision. The aim of the research was to assess the effect of the stock market performance on economic development in the East African community.The quantitative research methods were employed to define the nature of relationship between the variables.The populations of the study was the All-Share index in the 4 stock markets in the member countries. To fulfill the purposes under the research, the stock market performance of the EAC member countries was collected from the Capital markets, EASRA and the respective Stock Exchanges.Data for GDP growth was collected from the World Bank website.The study employed the Vector Autoregressive (VAR) model as well as the Granger test for causality to estimate as well as provide evidence regarding the nature and direction of relationship of the variables.The results indicated a significant long run association amid market capitalization and GDP growth. The relationship was negative in the short-term nonetheless constructive in the long-term. These results depict that an increase in stock market capitalization in the EAC contributes to the economic growth of the EAC in the long term. There was a long term constructive relationship between liquidity and GDP growth. Liquidity in the economy enables employment of high production techniques that are long term and enables the enjoyment of economies of scale. The VAR model on share price volatility indicated no significantlinkages both in the short term and long-termto GDP growth.With the above results, it is recommended that the policy makers in East Africa Community should come up with policies and measures to ensure that more efforts are geared towards improving efficiency, lowering transaction cost and increasing liquidity in the East Africa Community securities markets with an objective to improve equity turnover. It is further recommended thatpolicies to encourage more companies to list on the stock markets especially in Rwanda and Uganda to improve market capitalization and liquidity should be put in place to spur economic development. Whereas there was no noteworthy connection between share price volatility and growth in the economy, a stable macroeconomic environment is necessary to support the stock market action With the establishment of the EASRA as well as the expected integration and financial deepening of the EAC economies, it is recommended that a further study on other factors Influencing the economic development in the EAC be carried out to guide policy makers in developing measures to spur economic development in the region.