The Effect of Domestic Borrowing on Capital Market Development in Eac Member Countries

Abstract

In EAC countries, governments have been using public debts (domestic and international debts) to fund their budgets and expenditures. Compared to other parts of Africa, the EAC is one of the developed regions in Africa. The objective of the study was to examine the impacts of domestic public debt on the capital market development in East Africa community member countries. The study variables used were domestic public debt, inflation rates and interest rate on capital markets development. Keynesian Model, David Ricardo Theory and The Debt Overhang Theory informed the study. This study adopted the descriptive study design. This study used 5 EAC capital markets as its population. The countries that include Kenya, Uganda, Burundi, Rwanda and Tanzania were chosen as the population since they have similar regulations in relation to domestic public debt. Due to the small population, no sampling was conducted. This data was obtained from various sources that include East African Countries Central Banks, World Bank information, National Treasury Public Debt Department and Kenya Bureau of Statistics. Examples of data collected in this case include EAC countries Total Debt Value, inflation rate interest rates and Gross Capital Formation. Regression of coefficients results showed that domestic public debt and capital markets development are positive and significantly related (r=-4.518, p=0.030). The results further indicated that inflation and capital markets development are negatively and not statistically significant (r=-0.093, p=0.116). It was further established that interest rate and capital markets development were positively and significantly related (r=0.345, p=0.003). Based on these findings, the study recommends on continued deepening of the capital markets to lengthen further the maturity profile of domestic debt and diversification of the investor base. The study further recommends on continued implementation of policies to support macroeconomic stability and faster economic growth. This includes restructuring public debt towards external borrowing which is comparably cheaper than domestic debt, and rationalization of recurrent expenditures to contain the widening deficit in the primary balance would be necessary in the medium-term to ensure that public debt remains on a sustainable path to allow for capital markets development. The study independent variables were only able to cover a section of the effect on capital markets development as shown in the regression model. Therefore, further research should be conducted to investigate the other factors that affect the capital markets development such as exchange rates, money supply and budget deficits. Behavioral factors should be studied in order to establish whether they affect capital market development. The impact of political risk on capital market development in East Africa Countries should also be examined to determine whether the political environment affect the development of the stock market. It will also recommend policies and measures which will cushion on the same. The study recommends further research on the factors that formulate the capital markets development i.e. market capitalization since the listed companies may vary from year to year in performance which in turn affects the market capitalization of the country per annum, GDP and other factors in the Economy that affect the development of financial markets development.