The effect of public sector borrowing on economic growth in Kenya

Abstract

Public sector borrowing is the debt owed by a central government. In federal states, government debt may also refer to the debt of a state or provincial, municipal or local government, the borrowing resource as one of the main supplements that fill the financing gap should yield at least an interim period growth for many developing countries The effect of external debt on growth may also be obtained from the efficiency of external debt management, when the debt funds are channeled into growth promotion orientations with effective usages that can make the positive effect of debt on growth more than the negative effect. The study sought to determine the effects of public sector borrowing on economic growth in Kenya. The research was based on Debt Overhang Theory, Theory of Expenditure, and Neoclassical Growth Theory. This study adopted a descriptive research design, secondary data was collected in this study. The study used secondary data on external borrowing from the Ministry of Finance, Kenya National Bureau of Statistics, and Central Bank of Kenya (CBK), internet, world development indicators and World Bank data. The data was collected from 1964 to 2014. Data was analyzed using SPSS version 21.0. The study established a significantly strong positive correlation between economic growth (GDP) and domestic debt (r=0.990, p=0.000), external debt (r=0.963, p=0.000), domestic interest (r=0.954 p=0.000), domestic debt redemption (r=0.923, p=0.000) external interest (r=0.707, p=0.000), external debt redemption (r=0.692, p=0.000). The study also established a significantly weak and negative correlation between the rate of inflation and economic growth (GDP) (r = 0.385, p= 0.039. The study concludes that Kenyan economic growth rate is significantly influenced by public borrowing. Particularly, debt payment and interest negatively influence economic growth in Kenya. The study recommends that the Kenyan government should encourage sustainable external borrowing provided the funds are utilized in productive economic avenues. The government should institute efforts to channel domestic debt revenue to productive activities in the economy so that debt does not rise to become unsustainable. This would require funding well appraised productive projects to foster economic growth. Excessive domestic borrowing can be inflationary and may crowd out private sector borrowing; therefore close monitoring of government borrowing through the domestic market is therefore necessary. The study revealed that moderate inflation rates can yield gains in GDP growth; therefore policy makers in Kenya should low rates of inflation in order to foster higher economic growth.