Effect of public debt on economic growth in Kenya
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Date
2016-05
Authors
Ngugi, Wanjuki Njiru
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
The study investigates the effect of public debt on economic growth in Kenya, between
1980-2013.The choices of period was guided by data availability and escalation of
Kenya’s public debt. The main problem is that, Kenya government has been relying
heavily on public debt, aid and grants as a source of finance. This has resulted to a
buildup of the level of public debt stock which has led to funds being diverted to debt
servicing at the expense of economic development and domestic consumption. The
specific objectives for the research were to assess the effect of external debt on economic
growth in Kenya, to determine the effect of domestic debt on economic growth in Kenya
to find out the moderating effect the private investment has on public debt and economic
growth in Kenya. The study adopted Debt overhang hypothesis, the Crowding out effect
neo-classicalists theory and Endogenous growth theory for the study objectives. Causal
research design was applied and annual financial data was collected from Kenya National
Bureau of Statistics and Central Bank, while economic data was collected from World
Bank for the period 1980-2013. The researcher used a data collection schedule as a tool
to collect time series secondary data. For this purpose two models-public debt model and
Growth model have been used in this study. Debt model has been used to identify the
nature and extent relationship of total public debt with the variables- total debt service,
real exchange rate, real interest rate and inflation. In the debt model effect of domestic
debt and external debt on the real GDP of Kenya has been captured. Times series
regression model has been used to determine the effect of public debt on economic
growth in Kenya and data was analyzed using E-views 8. Various tests were carried out
to test for stationarity, normality, autocorrelation, heteroscedasticity using the same
software package. The data series used were stationary at integrated order level zero as
given in the KPSS results. The coefficient of determination (R2) indicated that about
82% of change in GDP was accounted for by the explanatory variables while the
adjusted R-square of 73% further justified this effect. Public debt servicing, domestic
debt , real interest rate, inflation and a lagged PIGR affected the growth of the GDP
negatively while external debt, real exchange rate, lagged GDP and private investment
affected growth of the GDP positively. This study recommends that public borrowing
(government) from international markets and domestic debts should be contained since it
leads to high cost of borrowing and crowding out of the private sector.
Description
A thesis submitted to school of business in partial fulfillment of the requirement for the award of degree of Master of Science in Finance at Kenyatta University. May, 2016