The Effect of Domestic Public Debt on Financial Market Development in the East African Community

Abstract

Public debt is one of the main macroeconomic indicators of how the country’s economic growth is performing and it forms the image of the country to the International markets. Public Debt management assists in economic growth and stability through resources mobilization. The objective of this Study was to examine the effects that Domestic Public debt has on the Development of Financial Markets in the East African Community Countries. The study used Secondary Data collected from the various sources; the World Bank website, East African Community website, the National Treasury, Central Bank of Kenya and the Kenya National Bureau of Statistics. The study period was between the financial years 2007-2016.The data was collected using data collection sheets and analyzed using SPSS for the ten years under review for five EAC Community Countries. Domestic debt is found to have a positive effect on the financial market development in East African Community. Inflation rate had a negative relationship with development of financial markets thus it was found that an increase in inflation rates leads to a low financial market development. Interest rates had a strong but positive relationship with financial markets development. This means that an increase in interest rate lead to an increase in financial markets development. Domestic debt should be encouraged so as to enhance financial markets development in the East African Community. Investments and government borrowing should be acquired from within. This will lead to reduction of external foreign debt and will lead to stabilization of the EAC economies and competitiveness with the rest of the Africa’s community countries. The government should develop a framework and policies that monitor, manage and encourage domestic public debt since it helps in reducing foreign debt that affects inflation rates of the countries. Reliance on public domestic debt makes the EAC to be independent and leads to reduction of external borrowings that have stringent requirements that derail the development of financial markets. Further research study is recommended due to limited time and resources. The study did not fully explore other factors that have an effect to Financial Markets development. More studies are also encouraged on independent variables like Domestic debt, Interest rates and Inflation which were not exhaustively discuss in this study.