Received: December 23, 2019 Accepted: December 27, 2019 Published: December 27, 2019
The aim of this study was to determine the effect of external public debt on economic growth in five East African countries namely; Kenya, Tanzania, Uganda, Rwanda and Burundi, but due to data unavailability Burundi was dropped. More specifically, the study intended to achieve two specific objectives. The first objective was to examine the relationship between external public debt and economic growth in EAC member countries while the second objective was to examine the costs-risk trade-off for external debt on the EAC member countries economy. The study applied the panel data econometric models namely random effect and fixed effect models for a balanced panel data set of 4 sampled countries over the period of 1984-2017. The estimated results passed all basic panel data econometric tests by which random effect model was confirmed to be appropriate for objective number one final estimation of results and fixed effects model for objective number two. The empirical findings suggest that external debt has statistically negative effect on economic growth in East African Countries. The results further revealed that domestic debt, on the other hand, had no significant effect on economic growth. Additionally, capital stock had a positive relationship with economic growth. However, all the three macroeconomic factors tested namely; real interest rate, inflation rate, and exchange rate did not have a significant effect on economic growth. The risk-cost analysis showed that EAC countries face exchange rate risks when borrowing. Specifically, a depreciation of local currencies led to an increase in public debt. In light of these findings, EAC countries should adopt an optimal balance between external and domestic debt to ensure sustainable economic growth. They should also implement measures to stabilize their currencies to avoid an increase in debt burden due to exchange rate depreciation.