Determinants of balance of payments among countries in eastern Africa

Abstract

Balance of Payments plays a crucial role as an economic indicator, giving valuable perspectives on economic exchanges of a nation on the global stage. Despite its significance, numerous African nations consistently grapple with deficits in their BOP, lacking clear explanations for such shortfalls. This dissertation employs fixed effects and random effects estimations to investigate the determinants of BOP, focusing specifically on Eastern African countries. Drawing upon data from World Bank development indicators spanning from 1991 to 2021, the study utilizes various econometric techniques to discern underlying trends. Key findings reveal that foreign direct investments exert a positive influence on BOP, while money supply, gross domestic product and trade openness exhibit negative impacts. Specifically, foreign direct investments emerge as statistically significant drivers, suggesting the need for policies that encourage and facilitate their inflow. In light of these results, fostering an environment conducive to foreign direct investment through incentives, infrastructure investment, and the establishment of favorable legal frameworks are recommended. Additionally, certain variables were found to have negligible impact on BOP, underscoring the importance of focusing efforts on factors proven to be statistically significant.