Stock Market Performance and Economic Growth in the East Africa Community

Abstract

Stock markets in developing nations are faced with various constraints such as thin trading, liquidity issues and lack of developed investor base. The EAC has seen its GDP growth decline from 6.8 percent in 2010 to 5.3percent in 2019, despite making much advancement in changing the financial sector and initiating measures to support financial deepening. Even though stock market performance in developing financial markets has the capability to enhance economic growth, its direct contribution to the combined economies of the countries in the EAC has not been well investigated. Several researchers hold divergent views concerning the directions of causality between the stock market performance and economic growth. This study investigated the effect of stock market performance on economic growth in EAC spanning from 2002- 2019 by specifically assessing the effects of capitalization of markets, turnover ratio of stock and value of stock traded on economic growth in EAC.The study also tested the causality between stock market performance and growth of the economy. This study was underpinned by AK model framework for economic growth since it emphasizes on the long-term growth which may affect economic decisions of a country. The study relied on secondary data sourced from EASRA, capital markets and Stock Exchanges of the EAC member countries that is USE NSE, RSE and DSE. Panel Vector Autoregressive VAR technique was used in estimation. The results of the research indicated a positive correlation between the performance of the stock market and the EAC economic growth. With Regards to causality there was a two-directional causality between market capitalization, turnover of stock and growth of the economy, however there was a unidirectional relationship between stocks traded value and the economic growth of the economy in EAC. Therefore, the study is beneficial to East Africa Securities Regulatory Authority (EASRA) in designing of policies that creates favourable business environment for stock markets to flourish. The study is also useful to future scholars as it adds to the existing literature. The study recommends that the EAC governments should design policies that ensure that there is improved stock market efficiency among the member states. This can be fulfilled by encouraging more companies to go public as this would increase liquidity in the stock market. Liquidity in the market attracts more foreign investment and portfolio that can spill over to the economy.