The Impact of Public Debt on Inflation, Gdp Growth and Interest Rates in Kenya

Abstract

This research looks at the impact of public debt on three major economic indicators (Inflation, GDP growth and Interest rates) in Kenya. The study was conducted with the objective of finding out the relationships that exist between these variables and public debt. The study draws upon secondary data on the mentioned variables published by the government of Kenya covering the period 1996 to 2011. Most prior researches on public debt focus on its links with single variables and sustainability issues. Findings from these studies vary across variables. Some studies show positive relationships, others negative relationships while others show mo relationships at all. The study adopts a descriptive research design in studying the impact of public debt on inflation GDP, and interest rates in Kenya. Using three simple linear regression models, the study finds out that there is a weak positive relationship on the public debt-inflation- GDP growth link with the public debt-GDP growth link being the highest. A negative strong relationship is observed alone the public dept-interest rates link. On a general note, the study concludes that the Public Debt-Inflation-GDP growth- Interest rates link cannot be found in a single analysis. The relationship varies across variables. While other variables show a weak relationship others portray a strong one. For instance, of the variables compared in this study public debt and interest rates show the strongest relationship. Next is the relation between public debt and GDP growth which is moderately weak; and finally public debt and GDP growth which shows the least among the three variables. Apart from sustainability concerns, high public debt levels may directly or indirectly harm economic growth. To mitigate this situation policy makers are urged to consider tightening and streamlining new borrowings to development needs and prioritize such needs to provide a conducive macroeconomic environment.