Journal of Finance and Economics
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Journal of Finance and Economics. 2021, 9(6), 221-230
DOI: 10.12691/jfe-9-6-3
Open AccessArticle

The Effect of External Debt on the Economic Growth in East Africa: ARDL Bound Testing Methodology

Abdikarim Bashir Jama1

1School of Economics, Banking and Finance, University Utara Malaysia, Sintok, Kedah, Malaysia

Pub. Date: December 12, 2021

Cite this paper:
Abdikarim Bashir Jama. The Effect of External Debt on the Economic Growth in East Africa: ARDL Bound Testing Methodology. Journal of Finance and Economics. 2021; 9(6):221-230. doi: 10.12691/jfe-9-6-3

Abstract

To attain the maximum goal of sustainable economic development, the government needs a substantial quantity of capital finance via investment expenses on infrastructural and productive capability progress. Lack of sufficient capital due to low savings, majority of developing countries seek to borrow from an outside source to bridge the resource gap. East African country's external debt outline has augmented over the decade to attain economic growth but this has terminated to low economic performance as demonstrated by high unemployment, high inflation, and elevation of the poverty rate. This has informed the requirement to conduct the present study to examine the effect of external debt on economic growth in East Africa. Utilizing ARDL bound testing approach and fixed-effect model for the period 2011-2019. Empirical results from ARDL bound testing approach fail to detect a long-term relationship between variables. However, the fixed-effect model indicates a negative and insignificant impact of exterior obligation on economic progress. An export variable was insignificant. While labor force and gross capital formation have a positive and statistically significant effect on economic growth. Therefore, the negative influence is insufficient of proper management for the funds borrowed from an external source that utilized unproductive projects. Subsequently, the administration ought accurately to apportion its outside debt for industrious investment and sustain an effective and well-organized obligation management policy.

Keywords:
public external debt export labor force gross capital formation economic growth ARDL fixed effect model

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