The impact of external debt on Economic growth. An empirical Investigation for kenya: 1970 - 2002

Abstract

This paper deals with the impact of external debt on economic growth in the Kenyan context. With the rapid build-up of external debt and the poor economic performance of the domestic economies, Sub-Saharan Africa Is debt crisis has deepened and the debt burden has become even more crushing. Indeed, relative to exports and economic activity (measured by the GNP), SSA IS debt is the highest of any region in the world. It seems incontestable that given the structural weakness of most SSA economies, their low income, low savings and low investment, the current high levels of debt and debt servicing would militate against rapid economic growth development. The severity of debt crisis in Kenya cannot be underestimated. The amount of external debt stock is quite huge. The debt servicing has taken the country into an economic crisis. Large external debt accumulation causes debt overhang that has adverse consequences on investment and growth because investors expect that current and future taxes will be raised to effect the transfer of resources abroad. The study has used both a linear model and a quadratic model to explain the impact of external debt on economic growth. The models were borrowed from an earlier study done by Pattillo et al. (2002). v The linear regression results have shown that the external debt has a negative impact on growth. Thus an increase in external debt worsens growth performance of the Kenyan economy.