Government Debt, Interest Rates, Fiscal Policy and Economic Growth in East Africa

Abstract

This study specifically sought to examine the effect of government external debt on economic growth. Investigate the effect of interest rate on economic growth. Establish the effect of government domestic debt on economic growth. Examine the effect of budget deficit on economic growth.  The study was carried out for the three East African Countries, Kenya, Tanzania and Uganda over the study period 1980-2019. Autoregressive Distributed Lag (ADL) Panel Approach was used to establish the effect specifically of government external debt, interest rate, government domestic debt and budget deficit on economic growth. Pooled Mean Estimator (PMG) was used to estimate both the general and full sample model. The results showed that in the long run government external debt (-0.2695232) (p= 0.543) and interest rate (-0.6846623) (p=0.380) had negative but not statistically significant effect on economic growth for the three. On the hand government domestic debt (0.276022) (p=0.067) and budget deficit (0.2736925) (p=0.073) had positive effect but not statistically significant effect on economic growth. The results of the short term showed government external debt (-1.739315) (p=0.103), government domestic debt (-0.407907) (p=0.083), budget deficit (-0.1924935) (p=0.350) had a negative but not statistically significant effect on economic growth for the three countries, while interest rate (-2.724875) (p=0.000) had a negative and statistically significant effect on economic growth for the three countries. In light of these results, and in order to achieve a positive economic growth it is recommended that all the East African countries, Kenya, Tanzania and Uganda should design and implement debt, interest rates and budget deficit policies to fit and align with other macroeconomics policies. Secondly, they should restrain their expenditure to sustainable levels to maintain a balanced if not surplus budget. Thirdly, they should endeavor to put economic and legal framework in place to eradicate corruption of public funds. Fourthly, they should design and implement policies to broaden tax base to support a balance budget. Fifthly, the governments should avoid a crowding through huge borrowings in the domestic market at the expense of the private sector.