The Relationship Between Public Debt and Economic Growth in Kenya (1985-2020)

Abstract

Governments all over the world have resulted to borrowing, both domestically and externally, to finance infrastructure projects like roads, railway and electricity. When utilized appropriately, public0debt can boost the economic0growth of a country. However, high levels of debt hamper economic development and achievement of developmental goals as they lead to increased inflation, discourage investments (crowding out of the private sector), increases uncertainties on policies and leads to future distortionary taxation (Hilton, 2021). This study sought to determine the magnitude and relationship0between0domestic0debt, external debt and economic0growth0in Kenya and0recommend appropriate policies related to public debt management in Kenya. The researcher utilized secondary0time-series0data0covering the period0between01985 and 2020. Data on public debt and economic growth was gathered from KNBS and World Bank using a data extraction checklist. The quantitative0data0was edited, coded and entered into a Stata version 14 for analysis where inferential and descriptive statistics were employed. The descriptive statistics0comprised of percentages, mean, frequencies and standard deviation while multivariate regression and correlation analysis were the main focus for inferential statistics. Regression analysis was utilized to assess the nexus between0independent0and dependent variable with a diagnostic test being done to verify the assumptions made in the regression model. Diagnostic tests included autocorrelation test, heteroscedasticity test, normality and stationarity test. The study found that domestic0debt measured in terms of domestic debt to GDP ratio has a positive0and0significant effect0on0economic growth (Gross Domestic Product) in Kenya with a regression coefficient of 0.3933 at 0.5% confidence level. External debt, as measured in terms of external debt to GDP ratio was found to have a negative and significant0effect0on0economic0growth (Gross Domestic Product) in Kenya with a regression coefficient of -0.1478 at 0.5% confidence level. The magnitude of the relationship was also found to be varying with a unit change in domestic debt leading to a 0.39 change in economic growth and a -0.14 change for a unit change in external debt. These findings provide critical information for debt management in Kenya. The study recommends0that0the0government0of Kenya should prioritize domestic debt as a source of finance to address the challenges associated with external borrowing. There is need for policy shift towards strengthening debt management institutions to carry out periodic review of both foreign and domestic debt structure in the country. The findings of negative and significant effect of external debt on economic growth signals a possible existence of debt overhang and there is need for government to explore foreign debt restructuring and renegotiations of terms with foreign lenders. To boost economic growth, Kenya need to improve on productivity and efficiency for locally generated wealth which will facilitate increased local borrowing without crowding out private investments. The study recommends a tax reform that will ease consumer burden and at the same time make it less expensive for firms to operate. Overall government spending should be directed towards projects and programmes that have high impact on economic development.