The Impact of Treasury Bond Market Development on Economic Growth in Kenya

Abstract

This study examined the impact of Treasury bond market development on economic growth in Kenya. The finance growth nexus forms the basis of the research with the bond market assumed to have a supply leading effect on economic growth. Most prior studies on effect of capital markets on economic growth have ignored the bond markets focusing only on stock market. Specifically studies focusing on the Kenya bond market are limited yet it is now very vibrant and a key source of funding for government projects. Using descriptive design the research focused on 14 year quarterly periods between 2001 and 2014. Correlation analysis and regression results were used to determine the impact of bond market development variables, bond market size and bond market turnover on economic growth variable, real GDP in Kenya. Control variables, government expenditure, lending interest rates and USD to Ksh exchange rates were also introduced to the model. The findings indicate that bond market development has a significant positive effect on GDP in Kenya, lending support to the finance growth nexus. However, when control variables are introduced, the two bond market variables become statistically insignificant, an indicator of the extent to which the bond market is still under developed and yet to significantly contribute to GDP compared to other determinants of economic growth. The study recommends that the government should take policy initiatives to foster growth of the Treasury bond market which is important in providing finance for capital intensive infrastructure projects in order to achieve the Vision 2030 objectives.