Effect of public debt on private investment and economic growth in Kenya
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Date
2024-05
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Kenyatta University
Abstract
The Kenya Vision 2030 set ambitious goals for the nation’s political, social and economic development. Specifically, the economic component aspires to attain a 10% annual economic growth rate. Achieving this goal heavily hinges on investments, and Kenya currently leans on taxes and public debt to fund investments and promote economic growth. An excessive dependence on public debt carries potential drawbacks, including the risk of crowding out private investments and obstructing long-term economic growth. The objective of this research was to examine the impact of public debt on Kenya’s private investments and economic growth. Many previous studies have delved extensively on the effect of external debt on private investments and economic growth. This study sought to examine the effect of public debt, with a primary focus on the effect of domestic debt on private investments and economic growth. Time series data spanning from 2000 to 2021 were utilized to analyse the causal relationships among public debt, economic growth, and private investments. A Vector Error Correction Model (VECM) was employed to estimate the models, because the diagnostic tests show presence of a long run relationship. The model provided insights into the dynamics between public debt, economic growth, and private investments in Kenya. The findings revealed a significant negative effect of domestic debt on private investment and foreign debt on private investment. The analysis also considered other variables such as income tax yield, and total money supply which showed significant associations with private investment. Additionally, the findings revealed a significant negative effect of domestic and foreign debts on economic growth. Other variables such as capital and labour also demonstrated significant associations with economic growth. The study concluded that continuous monitoring and evaluation of debt management policies are crucial to ensure the long-term fiscal sustainability of the nation and foster an enabling environment for private investment. The study recommends that policymakers implement strategies to enhance domestic capital formation and improve infrastructure and human capital. These measures can help reduce the reliance on public debt as a financing mechanism and promote sustainable economic growth in Kenya.
Description
A research project submitted to the department of applied economics in the school of business, economics and tourism in partial fulfillment of the requirements for the award of the degree of Master of Economics (Finance) of Kenyatta University, May 2024
Supervisor: James Maingi