Dynamics of external debt and its impact on investment performance in Eastern African sub-region countries: A longitudinal panel ARDL analysis (1990–2023)

The rapid accumulation of external public debt in Eastern African Sub-Region Countries has raised concerns about its implications for investment performance and sustainable economic growth. This study examines the dynamics of external debt and its impact on investment performance, focusing on the long-run and short-run effects of external debt and debt servicing on domestic investment and foreign direct investment (FDI) from 1990 to 2023. Grounded in the Debt Overhang Theory and macro-financial stability frameworks, the research investigates the conditions under which debt functions as either a catalyst or a constraint for investment. A longitudinal panel research design was adopted, using secondary macroeconomic data from the World Bank’s World Development Indicators. The study employs second-generation panel econometric techniques, including cross-sectional dependence tests, panel unit root analyses, and the Panel Autoregressive Distributed Lag (Panel ARDL) model estimated through the Pooled Mean Group (PMG) approach. This methodology allows heterogeneous short-run dynamics across countries while assuming homogeneity in long-run coefficients, enabling robust inference on both country-specific adjustments and regional equilibrium relationships. Findings reveal stable long-run relationships between external debt, macroeconomic variables, and investment. External debt positively and significantly affects domestic investment and FDI, suggesting that well-targeted borrowing enhances capital formation. Conversely, debt servicing negatively impacts FDI in the long run and constrains domestic investment in the short run, reflecting fiscal pressures and sustainability challenges. Inflation and high interest rates dampen domestic investment, while bank credit to the private sector consistently promotes investment. The study concludes that public debt’s impact on investment is conditional on debt sustainability, macroeconomic stability, and financial sector development. It recommends prioritizing productive debt utilization, strengthening debt management capacity, stabilizing macroeconomic conditions, and deepening domestic financial markets to maximize investment benefits in the Eastern African Sub-Region countries