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.