Public Debt, Output Volatility, Financial Deepening and Economic Growth in East African Community

Abstract

The general objective of the study was to establish the relationship among public debt, output volatility, financial deepening and economic growth in EAC, with specific objectives of establishing the relationship between public debt and economic growth, to investigate the moderating effect of output volatility on the relationship between public debt and economic growth, to examine the mediating effect of financial deepening on the relationship between public debt and economic growth and the joint effect among public debt, output volatility, financial deepening and economic growth in EAC. The study deployed longitudinal research design. The population of the study consist of six countries in EAC, Kenya, Tanzania, Uganda, Burundi, Rwanda and South Sudan. However, South Sudan and Burundi was isolated from the study because of paucity data. Data was collected from 2002 - 2020 and analyzed through autoregressive distribution lag model. It was noted that public debt positively and significantly influenced economic growth in EAC. However, the study revealed that there was no significant moderating effect of output volatility on the relationship between public debt and economic growth in EAC. Consequently, there was no mediating effect of financial deepening on the relationship between public debt and economic growth in EAC. On the joint effects among public debt, output volatility, financial deepening and economic growth, it was observed that both the current and lagged values of financial deepening as well as the current public debt were significant in determining the level of economic growth in East African Community. It was concluded that debt is good but only when invested in the productive sector of the economy. The study therefore recommend that greater emphasis should be paid to both current and lagged values of financial deepening and the current level of public debt if the East African Community is to realize meaningful change in economic growth. Similarly, the study provides up to date findings to support existing literature on public debt, output volatility, financial deepening and economic growth in EAC using variables and empirical model which prior studies could not sufficiently cover in developing countries.