Effect of Public Debt on Economic Growth in Kenya

Abstract

Resources are critical to cater for government expenditure to ensure it is well functioning. Taxes forms the source for government revenue, which it utilizes in funding projects. However, taxes are not sufficient for the government hence the need for borrowing with the objective of bridging the gap between revenue and expenditure. Objective of this study was to determine the effect of public debt on economic growth in Kenya. External debt and domestic debt were the main parameters of public debt while GDP indicated economic growth. Inflation rate and exchange rates were control variables. Collection of data was from 2017 to 2021 by aid of a data sheet. This research utilized descriptive research design with aid of STATA software. Survey outcome revealed that, R square explained variations of 0.352 in economic growth. This implies that, factors outside the model account for 64.8% of the variability in economic growth, while four variables considered contribute 35.2% of the variations. Analysis of Variance revealed the p value of 0.000, which is significant implying that the model was fit for drawing study conclusions. Further, analysis revealed that, inflation rate has a negative link with economic growth. However, the association is not significant (β=-0.035, p=0.073). Domestic debt revealed a positive and significant association with economic growth (β=0.332, p=0.002). Finally, survey revealed external debt has a positive and significant association with economic growth (β=0.285, p=0.000). Study recommends that, countries should use debt in financing of productive investments only. Financing of unproductive or consumption should not be by debt because it will not lead to long-term growth. Business organizations should be encouraged to take advantage of low rates of interest to borrow monies for investment purposes. This encourages business growth and ultimately economic growth.