Debt, Corruption and Investment in East Africa: A Panel ARDL Analysis

Abstract

We set out to investigate the relationship between public debt and private investment using a panel of four countries in East Africa for the period 1992-2015. The results from the Autoregressive Distributed Lag Models show that Public Debt (PD) crowds out both Private Domestic Investment (PDI) and Foreign Direct Investment (FDI) in the long run, although the magnitude of the impact is greater for the former category. We fail to find evidence of any short run significant relationship in either case. However, the importance of institutional quality in enhancing relationship in question is unquestionably confirmed in the data. The effect of PD on either PDI or FDI is observed to change when the corruption control improves. The immediate recommendation is the need to design fiscal policies to tame the growing debt that appears to discourage private investment in the region. A proper debt management system coupled with clear policies to improve the institutional quality would likely boost private investment in East Africa. The anti-corruption measures already in place should be enhanced to create a conducive investment climate for the private sector to thrive.