Effects Of Public Debt On Economic Growth Of East African Countries

Abstract

National debt if properly used can greatly benefit a country and contribute to its economic growth. However, various studies provide mixed findings on the effect of public debt on economic growth in various countries. The purpose of this study was to determine the influence of public debt on economic growth of three east African countries (Kenya, Uganda and Tanzania). Specifically, the study aimed to establish the influence of external concessional public debt, external commercial public debt and domestic public debt on economic growth of the three east African countries. This study applied a causal research design as it sought to assess effect of public debt on economic growth and collect secondary time series data for 57 years (1963 – 2019). The data on public debt and economic growth was collected from World Bank, Central Bank of Kenya, Bank of Uganda, Bank of Tanzania, Kenya National Bureau of Statistics, National Bureau of Statistics, and Uganda Bureau of Statistics. Dynamic panel data regression was used to analyze the collected data. The study findings established that concessional debt and external commercial debt had a significant positive effect on economic growth, while domestic debt had a significant negative effect on economic growth. Based on these study findings, the study makes the following recommendations. First, the study recommends that the three East African countries should source for more external concessional debt through bilateral or multilateral arrangements to plug into their budget deficits, invest in strategic assets and finance projects in neglected sectors. Regarding external commercial debt, the study recommends that the three east African countries should consider this source of funding but ensure that a balance is struck between the different external financing sources. Lastly, the study recommends that the level of domestic borrowing in the three East African countries should be reduced. This is because domestic borrowing is harmful to economic growth of the three countries.