A Pooled Mean Group Analysis on the Determinants of Current Account Balance in the East Africa Community

Since 2010 the current account balance of the East Africa Community Countries has been deteriorating. The countries namely, Kenya, Uganda, Tanzania, Burundi, and Rwanda have maintained current account deficits that are above five percent of their GDP. This pattern raises doubts about the sustainability of these deficiencies and the resulting debts amassed to fund them. If not addressed the deficits may erode the bloc's competitiveness in addition to hampering the fiscal development of the member nations. It is against this backdrop therefore that this study sought to examine the determinants of Current Account Balance for the 5 East Africa Community countries. It sought to analyze the long-term and short-term impacts of the select macroeconomic variables in regards to the current account balance by utilizing the Panel ARDL approach. The study period spanned from 1970-2017 based on data availability and the period being ample to measure both the long- and short-run results. I'm, Pesaran and Shin (IPS) test for Stationarity and Pedroni test for Cointegration were applied to the data, after which dynamic panel data regression techniques i. e. the Pooled Mean Group was applied as suggested by the Hausman specification test. The study established that external debt positively affects the current account balance in the EAC, credit to the private sector which was used as a proxy to financial liberalization negatively affects the current account balance both in the short-run and the long-run. The fiscal balance was established to give a positive effect on the current account balance both in the short- and long-run The actual effective exchange rate negatively affects the current account balance both in the short- and in the long-run. Finally, Terms of Trade negatively impacts on the current account balance in the long run.