The impact of external debts and debt service payments on private investment in Kenya 1970 - 2000

Abstract

Private investment remains not only a cornerstone but also an engine for renewed and sustainable economic growth. However, of late, the private investment rate in Kenya has declined. One of the possible causes for this continued decline is the huge external indebtedness that our country experiences. The central focus of this paper was to empirically assess the effects of external debt and debt service payments on private investment. Also the paper examines the factors that have led to the accumulation of external debt in Kenya. The paper confirms the presence of debt "crowding out" effects (effects of huge external debt stock) although it fails to confirm the presence of debt "overhang "effects (effects of external debt service payments) on Private investment in Kenya. Other factors that were found to affect private investment decisions in Kenya include public investment, inflation, terms of trade stocks and the real exchange rate. Also, the study findings indicate that both domestic and external factors are responsible for external debt accumulation in Kenya. They include terms of trade deterioration, real exchange rate misalignment, growth of income in industrialized countries, fiscal indiscipline and the rising real foreign interest on loans. There is need to adopt policies that will lead to a reduction in external debt and service payments.