Factors Influencing Public Debt In Kenya

Abstract

Public debt in Kenya continues to rise each year and now the country faces the possibility of plunging into a serious economic crisis due to inability of the government to repay what it owes. The purpose of this study was to investigate factors influencing public debt in Kenya. Specifically, the study sought to determine the influence of budget deficit, official development assistance, balance of trade and economic growth on public debt in Kenya. The study was anchored on the political business cycle theory, public choice theory and Ricardo’s theory on public debt. This study adopted a historical time series research design. The study was based on Kenya and data was collected quarterly for 20 years starting in year 2000 to 2019. A time series regression model was applied to analyze the collected data. This section provides the summary of the study findings. The summary is provided in relation to the research objectives. Regarding budget deficit, the study findings indicated that the first lag of budget deficit had a significant positive effect on public debt (β = 0.54, p = 0.009). The study findings also determined that the first lag of ODA did not have any significant influence on public debt (β = -0.15, p = 0.591). Concerning balance of trade, the findings showed that the first lag of balance of trade had a significant negative effect on public debt (β = -0.45, p = 0.008). However, the study findings indicate that the first lag of economic growth did not have any significant influence on public debt (β = -0.002, p = 0.971). Considering the findings made in the study, the study makes some vital recommendations. The governments should ensure that budget deficit is returned to sustainable levels and fiscal discipline observed. Regarding ODA, the government of Kenya should seek more multilateral and bilateral cooperation with development partners so that to enhance ODA as a large proportion of financing government recurrent and development expenditure. Further, the government of Kenya should enhance its balance of trade through expenditure-reduction measures that are intended to limit expenditure on imports and regulate demand, by putting downward pressure on demand, and thereby promoting private sector and household saving. Lastly, the study recommends stimulation of key sectors that contribute significantly to the economic growth such as agriculture, technology and manufacturing.