Effects of External Debt on Economic Growth in Kenya
Abstract
To overcome savings gap, developing nations have continued to acquire massive foreign loans.
Managing and repaying massive inventories of external loans has presented hurdles and
problems in developing countries, Kenya inclusive. When employed in productive sectors,
borrowed funds from other economies can help a country stimulate its economic growth.
However, mismanagement or excessive consumption can lead to growth retardation. The study
sought to examine effects of external debt on economic growth in Kenya. This was achieved
by analyzing annual time series secondary data from 1970 to 2018. The motivation behind the
study is that Kenya has been heavily relying on foreign borrowings to fund its annual fiscal
deficits and infrastructural development. Financing fiscal deficit through foreign borrowing
has raised Kenya’s debt load, increasing worries about its sustainability. The study adopted
ARDL bound cointegration test in which long-run link amongst variables was established.
Consequently, ARDL-ECM model was used to carry out empirical estimation and its outcome
yielded a valid long-run relationship between the variables utilized. The findings revealed that
external debt stock has positive effects while external debt services have negative effects on
Kenyan economic growth. In addition, both variables significantly affect economic growth.
The study concludes that external debt has positive contribution to economic growth in Kenya.
Furthermore, the study proposes that the government guarantee that loans are routed towards
productive sectors, diversify the economy to permit greater income generation, stimulate
capital formation, and acquire debts in essential capital areas when needed.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Economics [232]
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