Macroeconomic Cause-Effect Analysis of Government Debt on Interest Rates in Malawi

Abstract

This paper analyzed macroeconomic factors that affect the level of interest rates in Malawi for the period 1970 to 2010. Particularly the study aimed at investigating whether the stock of domestic debt led to particular levels of interest rates. The study found a negative and statistically insignificant relationship between total domestic debt and interest rates. On the other hand, interest rates in Malawi seem to depend much on the level of the Bank Rate which is the rate at which financial institutions borrow from the central bank as a lender of last resort. According to the results, increasing the bank rate by 1% was associated with a more than 1% increase in interest rates. In terms of policy therefore, recommend that the Reserve Bank of Malawi should lower the level of the Bank Rate so that private lending institutions can also lower their lending rates. This is the only way that will make credit not only accessible but also affordable which will end up increasing investments and consumption expenditure, the engine of economic growth and development.

Key Words: Interest rates, government expenditure, deficit financing, borrowing.