The Relationship between Domestic Public Debt and Economic Growth in Kenya

Abstract

The effect of Public Debt on Economic Growth is a debatable issue between scholars since the onset of the debt crisis in 1980’s. In international markets, one of the main macroeconomic indicators is public debt. It is one of the internal foreign direct investment flow determinants. Through resource mobilization, Public Debt Management helps improve economic growth and stability. Through export of primary commodities, Kenya as a developing country compliments its revenue. Successful governments have generated huge sums of Public Debt to finance National Development Plans in attempt to add to available domestic resources. Kenya’s economy faces a huge challenge due to the high debt level given that a large portion of revenues is geared towards debt servicing rather than 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, which may result in higher volatility and adversely affect economic performance. This study is therefore an effort to determine the effect of Public Debt on Economic Growth in Kenya. Specifically, the study tries to answer the question whether external debt and debt servicing have any significant effect on Economic Growth. The study uses a linear regression model to analyse Kenyan data from the economic years 1993/1994 to 2015/2016, with GDP growth rate as a function of Public Debt. Unemployment rate and Inflation rate were taken as control variables. The results indicated that Public Debt, Unemployment rate and Inflation rate were negatively related to Economic Growth, but not significant as indicators of Economic Growth. This study recommends to future scholars to research on qualitative variables of Economic Growth such as: corruption, political instability and elections, insecurity and Global economic issues.