Impact of Political Budget Cycles on Inflation in the East African Community

Abstract

Price stability is a crucial goal of macroeconomic policy in all economies, including the East African Community (EAC) region. However, concerns arise due to high fiscal deficits and inflation, and the relationship between price changes and fiscal deficits remains unclear. This study sought to address this gap by analysing the impact of election-driven fiscal deficits on inflation in the EAC. The study utilized Pooled Mean Group (PMG) estimation technique using data for the period 2000-2021. Inflation rate in the EAC substantially rose in election and post-election year. The study found a significant and positive relationship between fiscal deficits and inflation rates, particularly election-driven deficits. This implies that political budget cycles have a substantial impact on inflation within the EAC. However, it’s worth noting that in the year leading up to elections, inflation remained low, and fiscal deficits in the pre-election year had an adverse effect on it. Furthermore, the research revealed a positive association between money supply and trade with the present inflation rate, while a stronger domestic currency contributed to price stability in the EAC. The study suggests that countries in the region should strengthen fiscal rules and discipline to minimize deficits and ensure price stability.