The impact of external debt stock on economic growth: ethical dilemmas and evidence from East African community bloc

Abstract

Purpose This study aims to investigate the effect of total external debt stock on economic growth of the East African Community (EAC) bloc. Design/methodology/approach The study applies balanced panel data for seven of the eight EAC member states, spanning the period from 2013 to 2022, and uses panel data models, i.e. pooled ordinary least squares, random and fixed effects models. Findings The findings reveal a significant positive correlation between total external debt stock and economic growth, supporting the economic theory that reasonable levels of borrowing can stimulate economic growth, particularly when funds are channeled into productive activities. However, the relationship between foreign direct investment and economic growth lacks statistical significance, indicating challenges in attracting sufficient investment for substantial growth within the EAC bloc. Trade openness shows a negative and statistically insignificant correlation with economic growth. Additionally, the study finds a positive and significant correlation between the unemployment rate and economic growth, while the inflation rate demonstrates a positive but statistically insignificant relationship with economic growth. Practical implications The study recommends improvements in debt management practices, enhancements in the business environment, infrastructure investments, a reassessment of trade policies and initiatives to stimulate job creation and SME development. More importantly, governments should focus on expanding the tax base in ways that stimulate growth, thereby reducing reliance on external debt. Originality/value This study is unique as it revisits the effect of external debt stock on economic growth following Somalia’s recent membership in EAC bloc.