Public Sector Debt, Infrastructure Development and Economic Growth: Does Infrastructure Mediate the Debt–Growth Nexus in East Africa Community Member Countries?

Abstract

This study examined whether infrastructure development mediates the relationship between public sector debt and economic growth in East Africa Community (EAC) member countries, and whether the channel differs between internal and external debt. Anchored on the Debt Overhang Theory, the study used an unbalanced panel of six EAC countries over 2003–2022 (111 country-year observations). Mediation was tested using the Baron and Kenny four-step procedure with fixed-effects panel regression and Sobel tests. Both debt types raised growth and predicted infrastructure spending. For external debt, infrastructure was a significant partial mediator (Sobel z = 4.13, p < 0.001), transmitting about three-quarters of the total effect. For internal debt, infrastructure was not a significant mediator (Sobel z = 1.48, p = 0.140) and the direct effect rose rather than fell. External borrowing in the EAC delivers growth chiefly by financing infrastructure, whereas domestic borrowing works through other channels.

Keywords:       Public sector debt, internal debt, external debt, infrastructure development, economic growth, mediation, East Africa Community.