The Effect Of Public Debt On Economic Growth In Kenya

Abstract

Public debt is a critical component in economic development in any country. Its servicing is also crucial on a country’s economic growth seeing as it is the first charge made from the total revenue collected in a period. This study aimed at establishing the effect of Debt Servicing on economic growth in Kenya. The study sought to: ascertain the effect of external debt on economic growth; establish the effect of domestic debt on economic growth; and determine the effect of total interest payment on economic growth in Kenya. This study adopted a descriptive survey design and obtained secondary data on the variables. Data collected was in the form of Time series and quantitative in nature. The data was analysed by descriptive analysis. Inferential analysis involving correlation analysis was carried out to scrutinize the relationship between variables while regression analysis was performed to establish the strength of the independent variables against the dependent variable. Three independent variables which include Debt Servicing, Domestic debt and external debt were regressed against the dependent variable: -Economic growth in Kenya to observe the relationship thereof. The study used time series to model the impact of public debt and its subsequent servicing to the rate of Gross Domestic Product growth in Kenya, and applied time series models, to be specific ARDL-EC model in order to come out with a deep analysis on the relationship between the three independent variables and economic growth rates in Kenya. The study found that external debt was significant in explaining economic growth, domestic debt had a negative but insignificant relationship with economic growth at the 5% critical level and no particular effect on economic growth in the short-run and finally that while debt servicing has an effect on economic growth in the short run, the effect is not significant. The conclusion was that the public debt in general, has no significant impact on economic growth in the country in the short run. The study recommended that borrowing for investments in infrastructural projects as proposed for in the Vision 2030, meant at ensuring that the country achieves a middle- income economy status should be encouraged, proceeds from external debt should be utilized properly (For infrastructural developments and advancement of the social status of the people and external debt levels are controlled and capped).