The impact of external debt on public investment and economic growth in Kenya (1970-2007)

Abstract

Kenya has had to acquire external debt to supplement domestic savings due to scarcity of capital. Kenya has over the years relied heavily on foreign financing from both official and private sources. Unfortunately; this has resulted to a build up of the level of stock of external debt that has led to payment difficulties. This has led to funds being diverted to debt servicing at the expense of economic development and domestic consumption.

The study used time series data for the period 1970-2007 and reduced form growth model augmented with debt variables to examine the impact of external. debt on public investments and economic growth in Kenya.

The findings of the study indicate that the key debt indicators have been above the critical level since 1982. The Empirical results of the time series data analysis for the period 1970-2007 indicate that debt service ratio is significant at explaining the GDP growth in Kenya. Public investment has a negative relationship with both the stock of external debt expressed as a percentage of GDP and debt service ratio.

The results indicate that debt relief could act as a catalyst for investment recovery and economic growth in Kenya. The Kenyan government should also embark on an aggressive poverty reduction drive, focus on growth enhancing policies that will lead to increased export earnings, provide a stable environment for investments and implement measures that will increase investor confidence in local investments.