Non-Linear Effects of External Debt and Their Channels on Economic Growth in Kenya
Kiprotich, Ng’eno Haron
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Public debt in Kenya has consistently risen overtime, with larger portion being debt from external sources. Both positive and negative effects of debt have been experienced in Kenya since independence. In the last one decade external debt has been rising sharply relative to economic growth of the country, which seems to be stagnant overtime. Additionally, the country has been reporting several cases of corruption and mismanagement of public revenue at different levels of public and private sectors International Credit Rating Agency has ranked Kenya among the most corrupt nations (143 out of 180) with a corruption perception index of 28 percent in 2017. Report from International Monetary Fund indicated that Kenya has exceeded the generally accepted debt to Gross Domestic Product ratio of 50 percent as at February, 2018 by 6.2 percent. Additionally, the credit ratings of the country has been downgraded from B1 to B2 credit rating, implying that the country is rated highly speculative and that adverse financial or economic conditions may render the country inadequate capacity to meet its financial obligations. Therefore, this study examined the non-linear effect external debt on economic growth and their channels in Kenya. The objectives of the study included; first, assessing the non-linear effect of external debt on economic growth. Secondly, was to examine the non-linear effect of external debt through the channels influencing economic growth and lastly, to examine the effect of corruption on external debt in Kenya. Secondary data for the period 1970 to 2017 was collected from Kenya National Bureau of Statistics, the National Treasury of Kenya, Central Bank of Kenya, World Bank and International Monetary Funds abstracts. In this context, Autoregressive Distributed Lag was used in estimating the equations of the respective objectives after conducting the time series property tests. The empirical results for the study revealed the non-linear effects of external debt on Kenya’s economy. Additionally, the study established the a non-linear relationship between external debt and economic growth through investment channel by showing the existences of a positive effect on investment till a certain threshold beyond which excess debt causes crowding out of investment. Also, the study showed a positive effect of external debt on economy through Total Factor Productivity channel and a negative effect through interest rate channel. Lastly, the study showed the adverse effect of corruption on external debt in Kenya. The study concluded that external debt results to a negative effect on the economy if the government debt exceeds the debt threshold for the country.