The relationship between the government bond issues and economic growth in Kenya
Abstract
Interest in the relationship between the real and the financial sector has usually been on
the banking sector and the stock markets, thus mostly leaving the Bond Markets out as a
third essential source of external finance. The capital markets play important roles in the
economy growth of the market. The role of public debt in promoting economic growth in
Kenya has been the subject of much debate among economists, development specialists
and researchers. In spite of this, there are only few empirical studies that investigate the
contributions of public debt and in this case, the issuance of Treasury/ Government bonds
to economic growth in Kenya. This gap is filled by providing empirical evidence to
establish the relationship between the economy (represented by the Gross Domestic
Product) and issuance of Government Bonds in Kenya. This study explores the
relationship between issuance of Treasury/ Government bonds and economic growth in
Kenya using data that spans from the year 2003 to the year 2011 and establishing through
causal study if changes in one variable cause changes in the other. The time series data is
on gross domestic product, market capitalization of bonds, value of bonds traded and
total new issues of bonds. Regression analysis is used to analyse the data used in this
study. The results show that the issuance of Government bonds has a positive effect on
the level of economic growth in Kenya. The findings imply that Kenya could enhance its
economic growth by effectively and strategically strengthening the Bonds market and the
uptake of Government Bonds. The conclusion of the study is that the supply-leading
hypothesis of economic growth prevailed in Kenya during the period under study from
2003 to 2011. This implies that economic growth was finance-led through funds
mobilization. It is recommended therefore that the regulatory authority should initiate
policies that would encourage more companies to access the market and also be more
proactive in their surveillance role in order to check sharp practices which undermine
market integrity and erode investors’ confidence.
Publisher
University of Nairobi School Of Business, University Of Nairobi