Relationship between External Debt, Institutional Quality and Economic Growth: In Selected East African Countries (Panel Data Analysis)

Abstract

This study examines the Relationship between external debt, institutional quality, and economic growth in selected East African countries by using heterogeneous panel Autoregressive distributed lag (ARDL) model through pooled mean group (PMG) estimator for six countries over periods of 22 years starting from 1998-2019. Study employed fully modified panel least square to check the robustness of the estimate. We found that external debt stock as a percentage of GNI has a significant positive relationship on economic growth in the long run; whereas its square has a significant negative relationship with economic growth implying that there is a non-linear relationship and its positive effect exert on economic growth is up to 62.9% threshold level. The speed at which disequilibrium occurred in short run returns to long-run equilibrium is by 45.5 % as indicated by the coefficient of the error term. Moreover, we found that the indirect impact of institutional quality interacted with external debt has a significant positive impact on economic growth; which indicates that the negative effect of external debt on economic growth reduced as the quality of institutions improved in the region. This confirmed that the external debt economic growth relationship is the function of institutional quality; and improvements of institutional quality contribute to growth positively when above 1.72 threshold level. Consequently, the inclusive improvement of the status of institutional quality is necessary not only in reducing the deleterious impact of external debt but also in providing efficient benefits of governments borrowing, and the governments should reduce unproductive expenditure and to maintain proper fiscal management to stabilize the external debt.