External Debt, Institutional Quality and Economic Growth in East African Countries

Abstract This study aimed to analyze the impact of external debt on economic growth with mediating role of institutional quality by employing a heterogeneous panel Autoregressive distributed lag (ARDL) model through a pooled mean group (PMG) estimator over periods of 22 years spanning from 1998 to 2019 in East African countries. The finding reveals a significant long-term positive relationship between the stock of external debt as a percentage of GNI and economic growth. However, its square revealed a significant long-term negative relationship, suggesting a non-linear relationship. The positive effect of external debt on economic growth is limited to a threshold level of 62.9%. According to the error term’s coefficient, the rate at which short-run returns to long-run equilibrium became disequilibrium in the current year was 45.5%. Furthermore, the result shows that institutional quality’s indirect effect on external debt interaction had a significant positive impact on economic growth, indicating that the negative impact of external debt on economic growth decreased as the region’s institutional quality rose. Therefore, a comprehensive improvement in institutional quality is required to both lessen the negative effects of external debt and maximize the benefits of government borrowing. In order to stabilize the external debt, governments should cut back on wasteful spending and uphold sound fiscal management.