Name: Simidi, Paul Masinde

Topic: Public Debt, Selected Macroeconomic Factors, Governance and Sustainable Economic Growth In The East Africa Community Member Countries

ABSTRACT

In the last decade, the EAC countries have witnessed disparities between sustainable economic growth and rapid increase in the public debt. Consequently, there have been reclassification of these countries from low to medium and high-risk categories, due to the debt distress risk, raising concerns over debt sustainability. The governance indices have declined over the same period, eliciting public debate on the use of the public funds for public good. These unfolding events could potentially limit further borrowing to fund government operations especially due to budget deficits, thereby negatively affecting economic growth. Public and development finance practitioners are yet to agree on the effects of public debt on sustainable economic growth. Some theorists affirm that debt contributes to economic growth through capital accumulation, while other theorists opine that high levels of debt can trigger macroeconomic factors such as high interest rate and inflation rate, which can crowd out private investment leading to low economic growth. The study sought to establish the relationship between public debt and sustainable economic growth in the EAC member countries for the period 2000 to 2019. The study also sought to incorporate the influence of selected macroeconomic factors and governance in the relationships. The study is generally anchored on the Keynesian theory, which proposes that debt adds value than risk to a country’s economic growth. The study which adopted a panel longitudinal research design was premised on a positivistic philosophy as it relied on a secondary panel data of the variables. Data analysis in Eviews and SPSS was useful in conducting the analysis and inferring the interpretations thereon. Specifically, the study tested four hypotheses and nineteen sub hypotheses. With a two-year lag, the study established positive effects of public debt on sustainable economic growth levels in EAC member countries. Specifically, total debt and domestic debt have statistically significant positive effects on sustainable economic growth. In considering the mediating effects of specific macro-economic factors, the study established that inflation strengthens the relationship between total debt and sustainable economic growth. Gross capital formation strengthens the link between sustainable economic growth and external debt as well as domestic debt. The levels of government consumption expenditure strengthen the bond between total debt and sustainable economic growth. The study also established that inflation, gross capital formation and government consumption expenditure explains the connection between external debt and sustainable economic growth. The governance indicators for the EAC member countries have notably been not conducive over the years which consequently have affected the productivity of the public debt. Specifically, the study finds that governance strengthens the bond between domestic debt and sustainable economic growth on one hand and diminishes the relationship between total debt and sustainable economic growth on another hand. The study thus recommends that EAC member countries should improve on the governance indicators to attain the beneficial effects of public debt. The policy makers are encouraged to improve the macro-economic framework by improving on the indicators that strengthen the debt sustainable economic growth relationship. The diminishing indicators should also be improved on as well. As a guide to future research direction, the study recommends that an optimal level of debt for the countries be established especially the acceptable public debt threshold. Given that some macroeconomic factors strengthen the relationships while others diminish the relationships, studies can investigate the comfortable levels of the specific macroeconomic indicators for the diverse debt regimes. Lastly, studies can explore the debt covenants and the clauses therein to ascertain the effectiveness of the compliance with the debt covenants for attainment of desired sustainable development goals.