The Effect of Public Debt on Interest Rates in Kenya

Abstract

Kenya, like many developing countries often borrows to finance her budget deficits. This borrowing may have an effect on the macroeconomic factors. To this end, this study sought to establish the effect of Public debt on interest rates in Kenya. The research was based on Barro-Ricardo Equivalence Theorem, the arbitrage pricing theory and the Crowding-out Effect. This study adopted the Descriptive research design to explain the effect of public debt on interest rates in Kenya. The study utilized data on public debt , interest rates inflation rates, economic growth rates and foreign exchange rates instrument, for an eleven year period from 2005 to 2015. The data used was Secondary data and was sourced from the CBK and KNBS. Analysis of the collected data was done by the descriptive measures of central tendency including means, standard deviation, skewness, kurtosis. For the inferential statistics data was analyzed by correlation and the multiple regression analysis. The findings revealed between public debt and the interest rates there existed a relationship in the study period as evidenced by the model summary. The study established that the interest rate had a strong positive co-relation with public debt and exchange rates. The study further established a weak correlation existed between the economic growth and the interest rate and between the in rate of inflation and the interest rate. Public debt was the most influential in determining the interest rate in the country evidenced by the high beta co-efficient. Inflation also influenced interest rate positively. The regression results further revealed that Economic Growth rate and the Foreign exchange rate had a negative influence on the interest rate. The study recommendations are that, the Kenyan government should encourage public debt that is sustainable as excessive Public debt can have inflation effects and may also lead crowding out of the private sector borrowing, to this end, it is pertinent for government borrowing to be monitored closely.