Revista de Economía y Negocios

Impact of Financial crisis on Economic growth in East African countries

Abstract

Temesgen Furi

The relationship between financial instability and economic growth has created an interesting area of research for many years. To identify the financial crisis and economic growth in East Africa researcher use Empirical studies and secondary data. Most empirical findings use GMM, VAR, VECM AND FOLS method to found nexus between financial instability and economic growth. The finding reveals that main measurements of financial crisis are Debt crisis, currency crisis, banking crisis and deficit in general while the root causes of financial crisis are structural unstable monetary system, poor governance, unsustainable fiscal system, misbehavior of economic actors as well as Interest system and fiat money system (Monetary), administered price (Governance), volatile food/Fiscal and Behavior are the most dominant variables to cause financial crisis through Inflation and Growth. Empirical evidence shows that Annual credit growth, Nonperforming loan/total loans, capital adequacy ratio ,Liquid assets/short term liability ,Annual growth of M2 and Stock index volatility are early warning indicator of financial crisis and banking crisis. Thus, Structural reforms are needed in monetary system, fiscal system and governance, as well as in international system, which are more fair, just, stable and sustainable. Moreover, behavior of economic actors should be controlled by market conduct regulation and improved by education. To prevent financial crisis, Central Bank and Government advised to minimize budget Deficit, Debt crisis, currency crisis and banking crisis based on early warning indicators in advance before crisis occurred. Since Loan growth rate, NPL and BOP deficit mainly moving together with aggravate financial crisis, FED ought to see macroeconomic variables and restrict loan growth and financing as necessary.