Analysis Of Some Selected Factors On The Adoption Of GDP-indexed Bond As A Budget Financing Option In Kenya

Abstract

This study analyses some selected factors that could influence the adoption of GDP indexed bonds as a budget financing option in Kenya. Its specific objectives are to: examine how the openness of the economy could influence the use of GDP-Indexed Bonds as a budget financing option in Kenya; assess how capital market development could influence the use of GDP-Indexed Bonds as a budget financing option in Kenya; explore how government credibility could influence the use of GDP-Indexed Bonds as a budget financing option in Kenya and; determine how the volatility of returns could influence the use of GDP-Indexed Bonds as a budget financing option in Kenya. The study is founded on two theoretical foundations namely: Theory of Policy Credibility, and Keynesian Theory. It adopted the explanatory research design with data being obtained from secondary data sources. The data were checked for completeness, accuracy, and uniformity and cleaned. The data obtained was coded and analyzed. The researcher used the Statistical Package for Social Sciences (SPSS version 24) to analyze the data. Descriptive statistics (weighted means, percentages, and frequencies) and inferential statistics (Pearson correlation and regression analysis) were used to analyze the data. The findings from multiple regression show that openness of the economy, government credibility, capital markets development and volatility of returns had significant relationships with the feasibility of GDP-Indexed Bonds to finance budget deficits. Findings from the multivariate regression model showed that the combined influence of independent variables could explain use of GDP-indexed bonds to finance budget deficits in Kenya though the model was strong. F-test also showed that all the independent variables combined could statistically and significantly predict the feasibility of the use of GDP-Indexed Bonds in Kenya. Regression coefficients for all the independent variables were also significant. In this regard, the level to which the independent variables could statistically predict the feasibility of the use of GDP Indexed bonds to finance economic growth in Kenya were ascertained by the regression model. It could thus be concluded that ensuring openness of the economy, development of capital markets, credibility of the government as well as the predictability and steadiness of stocks returns could enhance the adoption of GDP-Indexed bonds as a financing option in Kenya. Based on the findings of the study, the following policy recommendation is made. The government needs to put in place policies for checking corruption and for enhancing its credibility among local and foreign investors. There should also be efforts to ensure that fiscal rules and the associated legislation are stable and do not change erratically so as to maintain investor confidence. The openness of the economy should also be enhanced to make it able to absorb different financial tools without problems. Limitations posed by taxes and any inflexible trade laws should be dealt with. The government should also constantly revise its legal and policy frameworks to ensure that capital markets adapt to emergent capital market demands to make the country competitive in the international arena. Mechanisms for reducing volatility of stocks should also be put in place.