The relationship between interest rates and investments in African countries

Abstract

Investments, being a crucial aspect for the general growth of any economy, have been thought to be influenced by interest rates. The current study aimed at establishing the relationship between the two; interest rates and the level of investments within the continent of Africa. The study also attempted to establish whether other factors which included exchange rates, unemployment levels, political stability and accessibility to domestic credit for private firms also had an influence on the level of investments in the different countries within the continent of Africa. The research established that interest rates and exchange rates affect the levels of investments negatively and significantly. The variables had a p-value of 0.041 and 0.021 respectively. Unemployment rate also was found to affect levels of investments negatively with a significant p-value of 0.021. Availability of domestic credit to the private sector and political stability was found to affect level of investments positively. While availability of domestic credit had a significant effect, political stability was found to have an insignificant influence on the levels of investments. These results indicate that, to boost investments in the continent, measures need to be taken to optimize on the interest rates and also strengthen currencies so that the exchange rates against the dollar do not move adversely. Countries also need to be conscious of contributing factors like political instability. Considering the established effect of availability of domestic credit to the private sector which is positive, economies need to take measures to increase lending to the private sector. The credit availability will provide the private sector with the required capital to invest and cause an investment growth. On unemployment, nations need to take steps to reduce unemployment levels in the continent. This can be achieved through proper training and research and emphasizing on self-employment which should be complemented with availing credit and at reasonable interest rates to ensure it does not have the negative effect it may have.