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.