Determinants of External Public Debt Servicing in Kenya (1980-2019)

Abstract

For the last one decade, Kenya has been facing an upsurge in the public debt which has seen the country plunge into debt crisis. As at the first week of April 2020, Kenya’s debt to GDP ratio had reached 70 percent, the highest ratio in the country’s history. Consequently, the high debt burden places huge responsibility of debt repayment which is likely to compromise the development agenda. Nevertheless, researchers have paid limited attention on determinants of debt service not only in Kenya but, the world at large. Thus, the study sought to investigate determinants of public debt service in Kenya. The study adopted a debt-servicing capacity framework attributed to works of Klein and Verbeek (1990). The study applied Autoregressive Distributed lad (ARDL) model to investigate determinants of external debt service in the short and long term using data covering 1980-2018. The data was collected from Kenya National Bureau of Statistics (economic surveys and statistical abstract), World Bank, International Monetary Fund, and Transparency International. Results indicate that net capital inflows, government deficit as a percentage of Gross Domestic Product, economic growth rate, interest rate determine external public debt service in both the short and long run periods. In addition, results for exports was found significant in the short run model while both unemployment and corruption were insignificant. The study recommends tightening of macroeconomic policies to reduce external public debt service burden. In addition, the government should create a conducive environment for foreign direct investment and/or encourage capital inflows as a remedy to external public debt service. The govenement should also encourage the creation and adoption of robust export policies that will boost Kenya’s export trade.