Determinants of current account balance in the east African community

Abstract

The East African Community has recorded rising and persistent current account balance in the last ten years. The countries namely, Kenya, Uganda, Tanzania, Burundi, and Rwanda have maintained current account deficits which were above five percent of their Gross Domestic Product. This trend has raised the concerns among economists and trade experts regarding the sustainability of the imbalances and the measures of alleviating them. If not addressed, the deficits may erode the bloc’s competitiveness as well as hampering the economic growth of the member countries. This study, therefore, sought to find out the determinants of the current account balance for the East Africa Community countries. The general objective of the study was to establish the determinants of current account balance in EAC while the specific objectives were built on selected macroeconomic variables, they included: to establish the effect of external debt on the current account balance in the EAC, to examine the effect of financial liberalization on the current account balance in the EAC, to investigate the effect of fiscal balance on the current account balance of the EAC, to determine the effect of terms of trade on current account balance in the EAC. The study period spanned from 1970 to 2017, the period was selected based on availability of data and the period being ample to measure both the long-run and short-run effects. The study sourced the data from secondary sources and used dynamic panel data regression techniques i.e. the Pooled Mean Group in analysis of the data. The study established that external debt had a positive effect on the current account balance in the long-run and no significant effect in the short-run. Similarly, financial liberalization had a positive effect on the current account balance in the long-run but there was no significant effect in the short-run. Fiscal balance had a positive effect on the current account balance both in the long-run and in the short-run. Real effective exchange rate had a negative effect on current account balance both in the long-run and in the short-run. Finally, the study established a negative long-run effect of terms of trade on the current account balance while in the short-run there was no significant effect. This study is useful to the East African secretariat in designing of policies aimed to reduce the soaring current account balance. The study recommends that EAC countries should improve their fiscal balance by minimizing fiscal profligacy by regulating public spending. Additionally, EAC governments should pursue policies and programs that support the growth of exports as well as the economies' productive capacities to reduce the current account deficit. One such measure includes devaluation of exchange rate to