The Relationship Between Public Debt and Level of Economic Growth in Kenya

Abstract

Public Debt is one of the major macroeconomic indicators, which forms a countries’ image being one of the inward foreign direct investment flow determinants of an economy. A prudent Public Debt Management helps economic growth and stability through mobilizing resources with low borrowing cost and limiting financial risk exposure. Kenya being a developing country compliments its revenue through export of primary commodities. In attempt to add to available domestic resources, successive governments have acquired huge sums of Public Debt to finance National Development Plans. A high level of debt in Kenya poses a great challenge for the economy because a large portion of revenues is devoted to servicing the debt instead of being put into domestic investment, thus reducing the prospects of economic growth. The conventional view is that a high level of debt may lead to crowding out and also constrain the scope of counter cyclical fiscal policies like taxation and public expenditure, which may result in higher volatility and adversely affect economic performance. This study is thus an effort geared towards determining the relationship between Public Debt and Economic Growth in Kenya. This study used a linear regression model to analyse economic growth, public debt, inflation and unemployment data from the fiscal years 1993/1994 to 2014/2015. The study used GDP growth rate as a function of Public Debt while taking Inflation and Unemployment rate as control variables. The study results indicated that Public Debt, Unemployment rate and Inflation rate were inversely related to Economic Growth, and hence not very significant as indicators of Economic Growth as depicted by the equation Y = 79.348+ -1.276X1 + -6.068X2 + -0.008X3 + ε . Of key concern is that public debt as an independent variable is statistically insignificant in predicting the variations in Economic Growth in Kenya.