Effect of External Public Debt Financing on the Economic Growth of East African Community Countries

Abstract

Public debts play a crucial role in financing of deficit budget. However, too much debt may become unsustainable for the country since revenue will spend on repayment of the interest and the principal amount at the expense of encouraging investment and therefore economic growth. Too much external debts results into crowding out effect as it deters local and foreign investors from investing and this adversely harms the economy. The level of public debt across East Africa countries has generally been on a rise. The aim of the study was to determine the effect of external public debt financing on the economic growth of East African community countries. The study adopted a descriptive research design. The population of the study comprised of 6 members’ states of EAC. The study relied on secondary data that was collected over a period from 2000 to 2017. The collected data was coded into SPSS and this analysis was done using descriptive and inferential statistics. Means and standard deviations formed part of the descriptive statistics while regression analysis was the inferential statistics. The study established that 65.9% change in economic growth of Kenya is explained by its external debt, (p=0.000), 55.6% change in economic growth of Uganda is explained by its external debts (p= 0.000), 76.1% change in economic growth of Tanzania is explained by the level of external debts (p=000), 83.1% change in economic growth of Rwanda is explained by its external debt level (p= 0.000) and that 59.2% change in economic growth of Burundi is explained by its external debt (p= 0.000). On overall, 64.5% change in economic growth in East Africa Community is explained by the external debts of the member states. The study concludes that external debt significantly influenced economic growth of Kenya as a country. External debts significantly influenced economic growth of Uganda, Tanzania, Rwanda and Burundi. In general, external debts had most influence on economic growth of Rwanda followed by Tanzania, Kenya, Burundi and lastly Uganda. On overall, a significant change in economic growth in East Africa Community is explained by the external debts of the member states. External debt significantly influenced economic growth of the EAC. The study recommends that the National treasuries of member states of EAC should carefully consider increasing the level of their external debts based on their ability to service and the overall capacity. Member countries of EAC should have clearly established threshold of a rise in level of external beyond which an alarm should be raised to signal danger. The member countries of EAC should borrow external debts for the purpose of economic growth. However, borrowing the debt with the aim of repaying another debt or for recurrent expenditure would not significantly influence economic growth of a country. The study recommends future studies to supplement secondary data with primary information. Future scholars should focus on countries across Africa as a whole apart from members of EAC in their studies.