Persistent budget deficit and lending interest rates in the West African Monetary Zone

Abstract

This paper explores lending interest rates’ impact on private investments in six West African Monetary Zone (WAMZ) countries from 2004  to 2020. Using the feasible generalized least squares (FGLS) and more robust econometric procedures (LSDV and POLS), the results show  that persistent budget deficits have significantly impacted lending interest rates within the WAMZ. The study concludes that country risk  premium, foreign interest rate, and money supply are critical predictors of lending interest rates. The study refutes the assertion that  budget deficits do not influence lending interest rates and gives credence to the neoclassical hypothesis. This explains that crowding out  private investments in the WAMZ is a possible outcome.