Effect Of Public Debt On Economic Growth In Kenya

Abstract

A developing country like Kenya compliments its revenue through public borrowing. The successive governments have always acquired huge sums of public debt to finance national development plans in Kenya. High levels of public debts have mixed effects on economic growth. This examines the effects of public debts on economic growth. Data spanning from 1963 to 2015 was used. The study sought to establish the effect of domestic and foreign public debt on economic growth in Kenya. A descriptive research design was applied. Secondary data obtained from World Bank Sources, Central Bank of Kenya, International financial statistics like the International monetary fund and Kenya National Bureau of Statistics was used for analysis. Data was analyzed using EVIEWS version 7.2. The findings indicated that economic growth is negatively and significantly related to external debt. The results indicated significant and negative associations between GDP and domestic debt. Multiple regression analysis indicated that economic growth is positively and significantly related to domestic debt. The association between debt service and GDP was positive but not significant. Other results also indicated that the association between debt service and GDP was positive and significant. Exchange rate had a negative and insignificant association with GDP. In light of the results and conclusions discussed in the foregoing paragraphs, the government and policymakers in Kenya should consider the following recommendations to improve public debt management. First, the governments should establish and adopt an optimal balance between external and domestic debt to maintain steady economic growth. Although domestic debt had no significant effect on GDP in the short run and a positive effect on GDP in the long run, it cannot be relied on entirely since a rapid increase in borrowing locally has the potential of crowding-out private investments. Second, the negative effect of exchange rate on economic growth is a signal to the central bank and Policy makers that they need to stabilize the local currencies for instance by improving exports. Since debt service causes exchange rate, proper management of debt service is hence a key priority for the government. The study also recommends that prudential fiscal management measures are required to avoid an unnecessary increase in overall public debt. A reduction in borrowing will enable the country to use a greater proportion of their tax revenues for investments rather than repaying loans, thereby increasing economic growth. Furthermore, real exchange depreciation raises the debt burden and negatively relates to GDP. There is thus the need to ensure that exchange is not over-devalued in order to balance two effects.