The structure, trend and impact of domestic debt on economic growth
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This study seeks to examine the structure, magnitude, level, and determinants of public domestic debt in Kenya for the period 1990-2001. It further examines the trend and impact of domestic debt directly on the economic growth, and indirectly on capital formation and private cum public sector investment. The study employs use of time series data for the period 1990 to 2001. The statistics show that a major proportion of Kenya' s outstanding stock of public domestic debt of Kshs 222.0 billion (or 36.6% of the total stock of debt) as at the end of December 2001 is short-term. Thus it is in the form of Treasury bills whose tenor is below one year. This makes repayment very expensive and detriment to the economy. History of domestic debt problem in Kenya can be traced back to 199211993. Thus domestic debt crisis is a 1990s phenomenon. The increment in public domestic debt over the period under study can be attributed to a number of factors. These include; diminishing inflow of external grants and concessional loans, use of government securities to mop up excess money supply following the excessive liquidity released in the economy in 1992 and 1993, frequent net repayments of external debt, budgetary support to inefficient parastatals, loose fiscal policy, and the need to sterilize large short-term capital inflows attracted by the high interest rates. Theoretical literature shows that prudent borrowing to finance a budget deficit is not a problem. However, servicing of huge accumulated domestic debt channels resources away from essential government operations, especially development projects. For instance, interest cost on debt raises Government recurrent expenditure (currently stands at 12% of the total government expenditure), which worsens the budget deficit. Although the current domestic debt servicing 'crowds-out' private sector investment, the effect is not significant as at now. But the trend at which it is accumulating is a major issue of concern. In the current government recurrent expenditure estimates, about 38% of the total estimates will be spend on debt servicing. This research proposes various policy recommendations to manage Kenya's domestic debt before it reaches detrimental levels.
SponsorhipUniversity of Nairobi
Department of Economics, University of Nairobi