Does Government Borrowing Affect the Supply of Private-sector Credit? A Kenyan Experience

Abstract

Public debt is gaining prominence in Kenyan and African political decision-making. It is also a hot subject in the macroeconomic management in most economies of the world. This study aimed at investigating the effect of Kenya’s government borrowing on credit availability to the private sector. More specifically, the study sought to investigate the effect of key macroeconomic variables such as the country’s lending rate, actual exchange rates and rate of inflation on credit availability to the private sector. A time series data between 1971 and 2020 from the global development indicators was used. The research used an autoregressive distributed lag model and tested for a long run connection using an ARDL bound test in order to investigate whether or not domestic public debt has an effect on credit extended to the private sector in Kenya. Based on the findings of the estimated model, it was discovered that public debt does not have an effect on credit extended to the private sector, either in the short run or the long run. In light of the three quantity channel theories, the aforementioned points point to the possibility of an excess of liquidity within the banking sector of the nation. From the findings of this study, which showed that the private sector credit was unaffected, the government can borrow in order to reap the benefits of borrowing, such as achieving and maintaining full employment, achieving high economic growth, and maintaining wage and price stability.