External Debt and Domestic Investment in Eastern Africa. Assessing Debt Sustainability and Investment Dynamics
DOI:
https://doi.org/10.51137/wrp.ijsbe.666Keywords:
External debt, domestic investment, Eastern Africa sub-regional countriesAbstract
External debt remains a key development finance instrument for many developing economies, yet its impact on domestic investment is highly debated. In Eastern Africa, rising debt levels have raised concerns about fiscal sustainability and investment performance. This study examines the effect of external debt on domestic investment in sixteen Eastern African countries over the period 1990–2023. The objective is to assess both the short-run and long-run relationship between external debt and domestic investment while considering debt sustainability dynamics. The study uses panel data and applies the Pooled Mean Group (PMG) estimator within an Autoregressive Distributed Lag (ARDL) framework to capture heterogeneous short-run effects and homogeneous long-run relationships. The results show a significant long-run negative relationship between external debt and domestic investment. This effect is mainly driven by high debt servicing obligations and reduced fiscal space. Short-run results are mixed, with some countries experiencing temporary positive effects depending on country-specific conditions and debt utilization patterns. Diagnostic tests confirm the robustness and reliability of the model. The findings imply that unsustainable borrowing can undermine domestic capital formation in the long run. However, well-managed external debt can still support investment in the short term. The study recommends stronger debt sustainability frameworks, prudent borrowing strategies, and improved domestic resource mobilization to enhance investment-led growth in Eastern Africa.
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Copyright (c) 2026 Kadili Wabomba, Benard Anthony Ojonugwa, John Mutenyo, Isaac Mokono Abuga, Willy Turyahikayo (Author)
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