Effect of Public Debt on Economic Growth in Kenya

Abstract

Countries all the world rely on internal and external financing to meet their recurrent and development expenditure occasioned by budget deficits. Evidence shows that the debt limit is significantly low in developing nations compared to the developed ones. In Sub Saharan Africa, the government's unsustainable borrowing has become increasingly problematic in recent years. Between 2010 and 2018, mean public debt in Kenya rose by half, from 40 to 59 percent of GDP, making Kenya to be among the fastest-growing debt-accumulation country in the world. At the same time, the country has also recorded significant growth in development spending and economic growth. The objective of this study was to determine the impact that public debt have on the growth of the Kenyan economy. Public debt, interest rates, the unemployment rate, and inflation were all considered independent factors in this study. The response variable that the researchers attempted to explain was the growth of the Kenyan economy. The data was collected on a quarterly basis over a period of twenty years (from January 2001 to December 2020). A descriptive research approach was employed in the study, with a VAR model used to examine the connection between the study variables. The data were analyzed using STATA. The study's findings yielded an R-square value of 0.1167, indicating that the chosen independent variables could explain 11.67 percent of the variance in Kenya’s economic growth, while the remaining 88.33 percent was due to other factors not investigated in this study. The F statistic was noteworthy at a 5% level with a p=0.0234, according to the findings of the ANOVA. This suggests that the model was adequate for explaining economic growth. Further, the findings revealed that public debt had a positive and significant influence on Kenya’s economic growth while unemployment rate had a significant negative influence. Interest rates and inflation did not exhibit a statistically significant impact on economic growth. The study recommends the need for policy makers to ensure that public debt is utilized properly as this will enhance economic growth. The study also recommends that there is need to manage the current levels of unemployment since they have a major impact on growth.