Effect of Public Debt on Economic Growth in Kenya

Abstract

The ratio of public debt to Gross Domestic Product (GDP) in Kenya has been on the rise. 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 countries in the world. At the same time, the country has also recorded significant growth in development spending and economic growth. The country offers a good context to investigate the effect of debt on economic growth. The objective of this research was to determine the effect of public debt on Kenya’s economic growth. The study was based on Pecking order theory, tradeoff theory and finance growth theory. The independent variable was public debt measured as log total debt per quarter while the control variables were interest rates, the unemployment rate, and inflation rate. The dependent variable that the research attempted to explain was the growth of the Kenyan economy. The data was collected on a quarterly basis over a period of ten years (from January 2011 to December 2020). A descriptive research approach was employed in the research, with a multivariate regression model used to examine the connection between the study variables. The study's findings yielded an R-square value of 0.613, indicating that the chosen independent variables could explain 61.3 percent of the variance in Kenya’s economic growth, while the other 38.7 percent was due to other factors not investigated in this study. The F statistic was significant at a 5% level with a p=0.000. This suggests that the model was adequate for explaining economic growth in Kenya. Further, the conclusions demonstrated that public debt had a negative and significant influence on Kenya’s economic growth. Unemployment rate also had a significant negative influence. Interest rates and inflation did not exhibit a statistically significant impact on economic growth. The research suggests the need for policy makers to review the set limit of public debt as high debt levels negatively affects the economy. The study also recommends that there is need to come up with effective measures of creating employment as high unemployment rate has an adverse effect on economic growth. The study recommends the need for future researchers to conduct a study for a longer period of time such as the last 30 years to capture the effects of economic cycles