Debt Sustainability and the Optimal Debt in Kenya

Abstract

Sustainability of debt and optimal debt of a country has become an important issue for adequate macroeconomic management. This paper looks at the debt sustainability and optimal debt of the government of Kenya that can enhance a 10 percent economic growth as projected in Vision 2030. In this regard cointegration testing of the present value budget constraint was the main tool that was used to empirically analyse the sustainability of the historical fiscal process and simulation was used to determine the optimal debt that could enhance achievement of 10 percent gross domestic product (GDP) growth as projected in Vision 2030. The findings suggest that public debt has infact been sustainable and point to the prudent public sector policies by the 'fiscal authorities. On the optimal debt, the findings from the simulation show that a debt to GDP ratio of35.2% is optimal to achieve a 10% economic growth projected in Kenya-Vision 2030.