Influence of Public Debt on Economic Growth in Kenya: An Empirical Analysis

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Kibigo, Charles Kamau
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Kenyatta University
Many countries across the world find themselves in positions of fiscal deficits that compel them to borrow either internally or externally from various sources to bolster improvement and advancements in their economies. However, the choice of employing such deficit financing, and to what extent, demands to be at levels deemed sustainable and in close tandem with the government’s budgetary needs, fiscal policies and public debt management guidelines. In this regard, policymakers in national governments and monetary authorities, as well as technocrats, international policy organizations and other non-state actors need to understand the influence that public debt obligations cast on the growth and performance of the economy so as to calibrate the effective debt policies that balances the suitability of using deficit financing to bolster economic growth and development. The pace at which Kenya accumulated public debt in the last almost a decade, justified on grounds of expanding its economy, has seen its share of public debt since independence more than double. This has raised concerns as to the influence that the accumulated debt has had on the Kenyan economy. The purpose of this study was to establish the influence that public debt obligation casts on the upheld growth of the Kenyan economy. In establishing this, the study looked to accomplish three objectives; to ascertain the influence of the size of public debt on nominal GDP in Kenya; to establish the influence of public debt services on nominal GDP in Kenya; and to examine the influence of public debt services on nominal GDP growth rates in Kenya. Debt Overhang Theory by Myers (1977) and Solow neoclassical growth model (1965) formed the two theoretical foundations whose contributions to existing literature motivated the discussions behind the empirical findings of this inquiry. A non-experimental, correlational research design approach was adopted in the assessment. Secondary time series data ranging from 1999 to 2019 was used to empirically analyze study variables. Vector Autoregression (VAR) estimation technique for a linear time series regression model and the Johansen’s multivariate cointegration test were performed to assess the short run and the long-run influence of public debt on economic growth. The results of vector autoregression (short-run) estimation between public debt and economic growth showed that the second lag of deficit financing has a causal influence on economic growth in the short-run at 90% confidence level. However, the presence of cointegration in the model variables concluded a long-run association between public debt and economic growth in the time series, implying that the variables are connected and can be consolidated in a direct design in the context of Kenya. The key findings of the study concluded that public debt in Kenya positively influences the country’s economic growth both in the short-run and in the long-run. This established influence birthed three policy recommendations: foremost, that the increased utilization of public debt ought to be considered only if it will result in expanded economic and production activities of the country, since economic growth in the country appears to increase with the size of public debt; Additionally, external commercial loans were found to raise the debt servicing costs, which may be detrimental to the long-run growth and the growth rate of nominal GDP in Kenya. Hence, greater amount of bilateral and multilateral advances and less of commercial loans should be preferred to forestall the increased debt servicing costs from watering down the gains of economic growth in Kenya; and finally; external debt servicing costs were found to adversely influence the long-run growth rates of nominal GDP in Kenya, and thus need to be controlled for in the public debt management guidelines so as to prevent their deleterious effects on the Kenyan economy.
A Research Project Submitted to the School of Humanities and Social Sciences in Partial Fulfilment of the Requirements for the Award of the Degree of Master of Public Policy and Administration of Kenyatta University, 2021
Influence, Public Debt, Economic Growth, Kenya, Empirical Analysis