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

Abstract

Purpose - This study endeavored to examine the effect of government debt, interest rates and fiscal policy on economic growth in East African countries.

Methodology – Secondary data was collected from the World Bank library for the period 1980 to 2019 using a data collection sheet. The data collected was in reference to total debt, interest rates, budget deficit and economic growth for Kenya, Tanzania and Uganda.  Step wise multi-regression data analysis was utilized given that the data was time series.  Step wise multi-regression data analysis shows the single–partial effect of key explanatory variable on the outcome variable; if there are changes in the significance of the key explanatory variables as regressors are added; whether the signs of key explanatory variables change as regressors are added; averts multi-collinearity problem and enhances the study by providing more information on factors influencing the behavior of the outcome variable.

Findings - The outcome unveiled that government debt for Kenya, Tanzania and Uganda on economic growth were all not statistically significant. The effect of interest rate on the relationship between government debt and economic growth indicate Kenya and Tanzania were not statistically significant but Uganda results were statistically significant. The effect of fiscal policy on the relationship between government debt and economic growth indicate   Kenya and Tanzania results were not statistically significant while Uganda results were statistically significant. The joint effect of government debt, interest rate and fiscal policy on economic growth indicates that results for Kenya were statistically significant while that of Tanzania and Uganda were not statistically significant.

Implications – High government borrowing has the effect of crowding out investors and potential rise in interest rates.  The governments should strive to have a balanced budget if not a surplus budget in order to minimize borrowings.

Value – This research contributes to public finance practice majorly in regard to government borrowing, interest rates, fiscal policy and economic growth. Experts in finance will find this research prudent on the aspect of to what degree government debt, interest rates and fiscal policy affect the growth of the economy of East Africa. The research will also be of value to government practice of borrowing as its findings informs the government on whether the debt is hurting the economy or not and therefore the government is able to take appropriate measures and thereby adhere to the best practices.  

Keywords: Government debt, Interest rates, Fiscal policy, Economic growth.