Impact of Fiscal Deficits on Economic Growth in the East African Community

Abstract

This study analysed the relationship between fiscal deficit and economic growth in the East African Community (EAC) at both regional and country level. The Pooled Mean Group (PMG) estimation technique was employed and panel data for the period between 2000 and 2021 to meet objectives of the study. PMG estimator gave both long run and short run regional outcomes and country-specific short run results. The findings indicate that there is a positive relationship between fiscal deficit and economic growth, with significance level of 1% observed in the long term. The country specific short run results reveal a negative link between fiscal deficit and economic growth in Burundi, Kenya and Rwanda while for Tanzania and Uganda the link is positive and significant. Real interest rate and inflation rate deteriorate economic growth in the EAC. Broad money supply growth and foreign direct investment boost economic activity in the EAC region. Fiscal restraint and discipline are required to promote economic growth in the region. There is need for governments to ensure price and interest rate stability through inflation targeting and limiting money supply.