PHD-Department of Economic Theory

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Browsing PHD-Department of Economic Theory by Subject "Interest Rates"

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    Effects of Public Debt on Investments and Interest Rates in Selected East African Community Member States
    (2023-11) Maugu, Lenity Kananu; Julius Korir; George Kosimbei
    East African Community member states have embarked on various strategies to promote investment in the region to accelerate economic growth. The Community has, through the East African Community Development Strategy, set out the priority programmes for the region focusing on macroeconomic cooperation; trade liberalization and development; cooperation in infrastructure; the development of human resources, sciences and technology. Despite these efforts, the private investment as per cent of Gross Domestic Product for almost all member states is below the level between 15 per cent and 22 per cent required to spur economic growth. Moreover, these countries voted to keep their interest rates low to bolster their economies. However, despite the many reforms, the interest rates are far much higher than in other countries in Africa, which are more developed. In an attempt to bolster investment, these states have increased public debt rapidly, exceeding the debt ratio of 50 per cent of Gross Domestic Product as provided in their treaty. However, the borrowed funds have not targeted value-creative economic and social projects, which can potentially outweigh the adverse effects of heavy indebtedness. The main objective of this study was to examine the effects of public debt on investments and interest rates in selected East African Community member states. Specifically, the study aimed at determining the effect of public debt on public investment, private investment and interest rate in selected EAC member states. The study used three theoretical frameworks; the debt overhang model, the classical theory of investment model, and the loanable fund model. The study used a descriptive panel research design. The dataset were drawn from secondary sources: World Bank’s World Development Indicators, Penn World Tables, Economic Surveys and Statistical Abstracts for the period 1980 to 2020. A dynamic common correlated effects approach was utilized to analyze objectives one and two, while the Panel Autoregressive Distributed Lag method was used to analyze objective three. The study established no relationship between public debt and public investment in the East African Region as one, but there was a negative effect in Kenya and Burundi and a positive effect in Rwanda. These results suggested that borrowed funds were not fully dedicated to public investment. Therefore, East African Community states' governments should strive to improve on this situation by channelling more of the borrowings to fund investments. Furthermore, the results showed that public debt did not influence private investment in the short-run. However, in the long run, it had a negative effect on private investments in five East African Community countries combined. These findings suggested that public debt crowd out private investments in East African Community. Therefore, it is advisable for East African Community states’ governments to employ mechanisms geared towards debt reduction. Besides, the governments should consider increasing and sustaining spending in sectors that complement private investment to stimulate the economy, such as investment in infrastructure and human capital. Finally, public debt was shown to positively affected the long-term interest rate in the five countries combined. These governments need to take effective measures to pursue fiscal discipline Additionally, EAC states can use concessional loans which have more favourable terms like lower interest rates, deferred repayments and income-contingent repayments.