DOES FINANCIAL DEEPENING MEDIATE THE RELATIONSHIP BETWEEN PUBLIC DEBT AND ECONOMIC GROWTH IN EAST AFRICAN COMMUNITY?

Abstract

Considering the rising levels of public debt and economic growth among East African Community (EAC) member states and the role of financial deepening in accelerating economic activities, the study sought to explore the mediating role of financial deepening in the relationship between public debt and economic growth in East Africa Community. The study deployed Judd and Kenny and Barron and Kenny approaches to test the mediating effect of financial deepening on the relationship between public debt and economic growth. The model uses hierarchical approach to determine the mediating influence on the variables. Longitudinal research design was used and quarterly time series data was gathered from 2002 to 2020.  The population of the study consists of six countries in EAC that is Kenya, Tanzania, Uganda, Burundi, Rwanda and South Sudan. The analysis was done through autoregressive distribution lag model. It was found that there was no significant mediating effect of financial deepening on the relationship between public debt and economic growth in East African Community. The findings imply that the government of EAC member states should appreciate that the association between public debt and economic growth may not be explained or accounted for by financial deepening. This finding presents contemporary outcome to supplement existing literature on the role of financial deepening in mediating economic growth in East Africa Community. The study also used variables and empirical models which prior studies could not sufficiently cover in developing countries perspective. Therefore, the study affirms that, there was no significant mediating effect of financial deepening on the relationship between public debt and economic growth in East Africa Community.

Key Words: Financial Deepening, Mediate, Public Debt, Economic Growth.