Causal Relationship Between External Debt and Domestic Investment: Implications for Sustainable Development in Eastern African Sub-Region Countries
DOI:
https://doi.org/10.51137/wrp.ijsbe.665Keywords:
External Debt, Domestic Investment, Causal Relationship, Sustainable Development, Panel ARDL ModelAbstract
External debt has become a major policy concern in developing economies. In Eastern Africa, rising debt levels and servicing costs threaten domestic investment, economic stability, and long-term sustainability. This raises concerns about whether external borrowing supports or undermines sustainable development outcomes. The relationship between external debt and investment remains debated in both theory and empirical literature. This study examines the causal relationship between external debt and domestic investment in Eastern African sub-region countries from 1990 to 2023. The analysis is based on balanced panel data for sixteen countries. The study applies the Pooled Mean Group (PMG) estimator within a Panel ARDL model framework to estimate short-run and long-run dynamics. The Dumitrescu–Hurlin panel causality test is used to determine causal relationships among variables. The results show a positive and significant long-run effect of external debt on domestic investment. However, debt servicing negatively affects investment in the short run. Inflation and interest rate volatility reduce investment. Financial sector depth promotes investment. The findings also reveal bidirectional causality between external debt and investment. The study concludes that external debt can support sustainable investment and economic growth if well managed. Its sustainability benefits depend on prudent borrowing, macroeconomic stability, and strong financial systems. The study recommends improved debt governance, sustainable borrowing practices, and enhanced financial sector development to ensure that external debt contributes to long-term economic and environmental sustainability.
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Copyright (c) 2026 Kadili Wabomba, Benard Anthony Ojonugwa, John Mutenyo, Isaac Mokono Abuga, Willy Turyahikayo (Author)
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