The Moderating Role of Government Effectiveness on the Impact of Interest Paid on Public Debt and Debt Levels on Economic Growth in East African Community Countries

ABSTRACT The impact of public debt on economic development is well documented in the literature. However, previous studies have mostly treated institutions as a homogenous factor. This paper highlights government effectiveness as the most important institutional factor that affects debt management and growth through better policy implementation, fiscal credibility, and public service delivery. The study uses EAC countries' data (1990–2022), which allows for greater diversity in government capacity while sharing similar regional objectives, thereby presenting an ideal case to explore the effectiveness of institutions on public debt management. We employ OLS and 2SLS with instrumental variables while accounting for the AR(1) process and confirm the robustness of its results through a dynamic panel and quantile regression. The findings reveal that government effectiveness reduces the adverse impacts of debt service and rising debt on economic growth, fosters creditworthiness and lower borrowing costs, and promotes the productive use of debt. This research adds to the body of knowledge on fiscal governance and has significant policy ramifications for facilitating effective debt‐financed growth in Africa's emerging economies.