Effects of Public Debt on Interest Rates in Selected East African Community Member States

Abstract

East African Community member states have embarked on various strategies to reduce interest rates in the region to boost investment so as to accelerate economic growth. However, despite the many reforms, the interest rates are far 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. The main objective of this study was to examine the effects of public debt on interest rates in selected East African Community member states. The study was anchored on the loanable fund model and used a descriptive panel research design. The dataset was drawn from World Development Indicators and Penn World Tables for the period 1980 to 2020. The dataset was drawn from secondary sources: World Bank's World Development Indicators, Penn World Tables, Economic Surveys and Statistical Abstracts for the period 1980 to 2020. The Panel Autoregressive Distributed Lag method was used to analyse the study. The study found that public debt had a positive effect on the long-term interest rate in the five countries combined. Therefore, 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