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

Abstract

Purpose -- The focus of this study was to investigate the relationship between public debt and financial market development in the East African Community Countries.

Methodology – The study adopted a descriptive study and used secondary data collected from the National Treasury, Central Bank of Kenya and the Kenya National Bureau of Statistics. The study period was between the financial years 2012 - 2016. The data was analyzed using descriptive and multiple regression analysis to test the relationship between Domestic Public Debt and Financial Market Development in East African Community Countries.

Findings – The results of the study found a negative relationship between domestic debt and financial markets development. Furthermore, there was a weak relationship between inflation rate and financial markets development. The study also revealed that there was a high variation on domestic debts due to various policies of debt management, Political instability, external debts and grants received from foreign donors, in the various countries in EAC community.

Implications – Most countries depend on external borrowings for their development projects and minimal domestic borrowings are acquired from the domestic market owing to the fact that domestic debt is has high interest rates when compared to the external debt which is acquired mainly on a concessional term, therefore it can be expensive to maintain. Domestic debt should be reduced by use of privatization programs, grants from donors. The government should, therefore, develop a framework to monitor and manage domestic public debt since it is growing at a high rate, reforms on private investments in Treasury bonds and treasury bills and commercial papers should be encouraged since it does not involve foreign currencies that have higher rate of interest.

Value – The study will be of great impact to the financial market sectors stakeholders would get a clear understanding of the major role they play in assisting the development of the country, how the domestic debt increases financial market development and reduces external public debt that tends to affect the country’s interest rates. The government of Kenya being the main beneficiary of the domestic Public debt will clearly see and align their internal debt borrowings from the financial markets institutions to promote development in the financial markets. The investors in the Bond Markets and Financial Institutions will be informed of the factors that lead to Government issuance of Treasury Bonds and Treasury Bills to the market and the impact it has on financial markets development and the economy at large.