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

Abstract

Purpose - This paper sought to establish the effect of external debt financing on the economic growth of East African community countries.

Methodology - The study was modelled as a descriptive survey. A data collection sheet was used to collect secondary data from the population of the 6 member states of East Africa Community over a period from 2000 to 2017. The data was examined using descriptive, correlation and regression analysis.

Findings - 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.

Implications - 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.

Value - The study will act as a guide to the National treasuries of member states of EAC in order to 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.

Key Words: external public debt, economic growth, East Africa community