Effect of External Public Debt on Economic Growth: an Empirical Analysis of East African Countries

5.4 Policy Recommendations 
In light of the results and conclusions discussed in the foregoing paragraphs, the government and 
policymakers in EAC countries should consider the following recommendations to improve 
public debt management. First, the governments should establish and adopt an optimal balance 
between external and domestic debt to maintain steady economic growth. Although domestic 
debt had no significant effect on GDP growth, it cannot be relied on entirely since a rapid 
increase in borrowing locally has the potential of crowding-out private investments.
Second, the negative effect of currency depreciation on public debt means that exchange rate 
stabilization is central to debt management. This means that measures such as improving exports 
should be implemented to ensure that local currencies are stable. As a result, the value of foreign 
currency denominated external debt will not increase significantly as local currencies depreciate 
over time.

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Finally, Prudential fiscal management measures are required to avoid an unnecessary increase in 
overall public debt. A reduction in borrowing will enable EAC countries to use a greater 
proportion of their tax revenues for investments rather than repaying loans, thereby increasing 
economic growth. 

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Appendix A 
LDVM 
_cons -16.76154 34.8254 -0.48 0.631 -85.67999 52.15691
_Icountry1_4 3.052513 2.857782 1.07 0.287 -2.602953 8.707979
_Icountry1_3 .8701697 1.924286 0.45 0.652 -2.937935 4.678275
_Icountry1_2 1.796352 4.149824 0.43 0.666 -6.416028 10.00873
lndomesticdebt -.4106035 .4913317 -0.84 0.405 -1.382935 .5617275
lncapitalstock 1.292782 .727991 1.78 0.078 -.1478904 2.733455
lnexchangerate .5055203 .608059 0.83 0.407 -.6978105 1.708851
lnexternaldebt -.1414329 1.606798 -0.09 0.930 -3.321239 3.038373
interestrate .0043556 .0566995 0.08 0.939 -.107851 .1165621
inflation -.1328004 .0890978 -1.49 0.139 -.3091224 .0435216
gdp Coef. Std. Err. t P>|t| [95% Conf. Interval]
Total 5473.5358 135 40.5447096 Root MSE = 6.2693
Adj R-squared = 0.0306
Residual 4952.25829 126 39.3036373 R-squared = 0.0952
Model 521.277506 9 57.9197229 Prob > F = 0.1646
F( 9, 126) = 1.47
Source SS df MS Number of obs = 136
i.country1 _Icountry1_1-4 (naturally coded; _Icountry1_1 omitted)
> y1
. xi: regress gdp inflation interestrate lnexternaldebt lnexchangerate lncapitalstock lndomesticdebt i.countr

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Appendix B 
LDVM