Effect of domestic public debt on economic growth in Kenya

Abstract

The shift in the composition of overall public debt in favor of domestic debt in subSaharan Africa countries has brought to the fore the need for governments to formulate and implement prudent domestic debt management strategies to mitigate the effects of the rising debt on the economy. Literature on the effect of public domestic debt on the economy in Kenya, and Africa in general, is scanty as most studies have largely focused on developed countries. This study aims at filling the gap occasioned by studies putting more emphasis on external debt as opposed to public domestic debt by using the most recent data to analyze the effect of domestic debt on the Kenyan economy. Causal research design was employed in conducting this study. The study used real quarterly time series data for 11 years from 2003 to 2013 which translates into 44 observations. Data for GDP, Domestic Debt, Private Sector Credit and Interest rates was obtained from the Central Bank of Kenya, the Treasury and the Kenya National Bureau of Statistics. The data was summarized in form of tables and graphs to reveal the trends of variables evolution overtime. To capture the relationship between the variables, a co-integrating regression model was utilized on the time series data. From the findings, the Mean for total debts was 61 billion USD with public domestic debt being 53.4 billion USD. Inflation and unemployment rates were 8.6 and 9.4% respectively for the 11 years observed while change in public domestic debt and total debt averaged at 0.3% and 1% respectively. Maximum GDP was found to be 8.6 with minimum of -0.4. Inflation was highest at 15.1% and lowest at 4.3% while unemployment rate was ranging between 9.2% and 9.6% respectively. The regression results indicated that the constant stood at 84.0 with coefficients being -0.75, -0.40, 5.91 and -6.03 for inflation, unemployment rate, public domestic debt and change in total debt respectively and respective significant level being 0.09, 0.39, 0.36 and 0.35. From the correlation analysis, it was noted that the correlation between GDP and all the four explanatory variables under consideration is negative while total debts has positive correlation between inflation and public domestic debt. The probability value for the regression model was 0.04 was obtained indicating the significance of the model in explaining the relationship between the GDP and the predictor variables considered. It was also inferred that there is negative correlation between debt and growth but show that debt does not have a causal effect on economic growth. The study makes recommendation among others that the government should make sure that the total debt for the country is kept at the lowest level possible. If the government has to borrow, it should consider domestic borrowing for the benefit of the economy of the nation.