An Analysis of Crowding-Out of Private Sector by Government Borrowing in Kenya
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Date
2022
Authors
Kinyua, Luke Wahome
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Abstract
The government of Kenya has been running budget deficits every year of its national accounting. The government has therefore been forced to borrow either from the domestic or external financial markets to bridge those deficits to offer its citizens services. Government borrowing creates other macroeconomic problems in the economy. The objectives of the research were to evaluate the determinants of government borrowing and the effects of that borrowing on private sector credit, the crowding out impact of state loans. Two models for each objective with clear variables based on economic theory were constructed for estimation where variables included government borrowing or domestic debt, budget deficits, lending rates, efficiency of tax agency, private sector credit and political factors. Data was collected from reports published by government agencies for period 1990-2021 and data analysis techniques included the Auto Regressive Distributed Lag model. Co-integration and unit root tests were done prior to analysis. Domestic government borrowing is determined by the level of budget deficit, domestic savings, inflation rate in economy and lending rates. Budget deficit and inflation rate were both found to positively and significantly determine government borrowing in the long-run, while else domestic savings and lending rate were found to be negative and significant in determining domestic government borrowing. The research findings on the impact of loans acquired by government on free enterprise economy capital in Kenya showed that domestic government borrowing negatively and significantly affect the level of private sector capital. The crowding out effect is huge as a percentage rise in loans acquired by government causes six percent of private sector investors crowded out of investment. Interest and lending rates were found to negatively and significantly affect private sector capital level. Based on the study findings, budget deficit should be minimized as much as possible by reducing unnecessary government expenditure. Similarly, domestic savings should be encouraged as this stimulates domestic investment due to availability of stock of capital for investment. Inflation rate should be maintained as low as possible below 5 percent in order to stimulate government borrowing. Lending rates should be kept low by central banks to increase lending by commercial banks as this ensures enough money is in circulation to facilitate borrowing and investment by the government in key sectors. Domestic government borrowing should be discouraged as much as possible, other sources of funds should be sort to finance expenditure such as health, infrastructural development, education and manufacturing. The study has demonstrated that state loans from local sources causes crowding out of the private sector investment and has also recommended ways through which state loans from local sources can be reduced to ensure private sector investment and spur economic growth of the economy
Description
A Research Project Submitted to the Department of Economic Theory in the School of Economics in Partial Fulfillment of the Requirements for the Award of the Degree of Masters of Economics of Kenyatta University, November, 2022
Keywords
Crowding-Out, Private Sector, Government, Government Borrowing, Kenya