The Relationship Between Public Debt and Economic Growth in Kenya

Abstract

Public debt is one of the main macroeconomic indicators, which forms countries’ image in international markets. It is one of the inward foreign direct investment flow determinants. A prudent public debt management helps economic growth and stability through mobilizing resources with low borrowing cost and limiting financial risk exposure. The objective of this study was to establish the relationship between public debt and economic growth in Kenya. The study used secondary data collected from various sources collected from the Kenya National Bureau of Statistics and the Central Bank of Kenya. The study period included 2002/2003-2011/2012 financial periods. The data was collected using data collection sheet which was edited, coded and cleaned. Data was obtained covering the period 1992/1993-2011/2012 financial periods. To establish the relationship between public debt and economic development, the study conducted a regression analysis. Domestic debt is characterized by higher interest rates compared with those on external debt, which is contracted mainly on concessional terms, and it is therefore expensive to maintain. Domestic debt reduction could be achieved using proceeds from the privatization programme of public corporations, or the use of externally borrowed resources which are mainly on concessional terms to retire more expensive domestic debt. The government should therefore develop a framework for recording and monitoring all contingent liabilities and also formulate and implement a policy for management of the contingent liabilities. The government should therefore continue to implement wider reforms that promote investment in Treasury bonds, and encourage institutional investors such as pension funds and insurance companies to invest in Treasury bonds.