The impact of external debt on private investment in Kenya: empirical investigation for the period 1970-2002
Abstract
A group of the low-income countries classified as Highly Indebted Poor Countries
(HIPC) have continued to experience difficulties in managing and servicing their huge
stocks of external debt and this has constrained private investment hence growth. Most of
these countries including Kenya are in Sub-Saharan Africa (SSA). The relatively high
level of Kenya's external indebtedness and rising debt burden has serious implications on
the country's development and debt sustainability initiatives.
This paper, using time-series data for the period 1970-2002, explores empirically the
impact of external debt on private investment in Kenya. The empirical result/ndicate
that external debt stimulates private investment while debt overhang effect works against
private investment. However the debt overhang effects are not statistically significant,
and this can be supported by the fact that Kenya is still considered as a moderately
externally indebted hence does not qualify for HIPC debt relief Initiatives.
Debt servicing appears to have a strong negative relationship with private investment as
a ratio of GDP, implying that the debt service obligations crowd-out private investment
in Kenya. Other policy and fundamental variables were also included in the model,
among them; terms of trade, public investment, lagged private investment and percapita
GDP growth rate were found to have an effect on private investment.
Several policy implications emerged from the study and particularly the need to diversify
the export base as well as discovering new markets and new products to help earn
foreign exchange to reduce debt service ratio.
Sponsorhip
The University of NairobiPublisher
Department of Economics