Examining the effects of public debt and interest rate on capital formation in Malawi

This study examines how overall capital formation is affected by public debt and interest rate in Malawi. It considers the main factors that influence total capital formation. Particularly, it explores the economic and statistical significance of the influence of public debt and interest rate on capital formation in Malawi. The study provides a comprehensive overview and expands the empirical knowledge of how public debt, interest rates, and capital formation interact in the Malawian context. It utilizes the Autoregressive Distributed Lag (ARDL) and Error Correction Model (ECM) to investigate short-run and long-run impacts using data from 1980 to 2023. The results indicate that public debt variables, particularly external debt and debt servicing obligations, negatively affect capital formation. It is also found that interest rate and domestic credit to the private sector exhibit more unpredictable dynamics, with short-term gains being reversed in the long run. These findings underscore the importance of prudent debt management and organised monetary policies to ensure that capital formation is sustainably supported over time.