Sustainability of Public Domestic Debt in Kenya: an Empirical Analysis (1980-2011)

Abstract

This study is about the sustainability of public debt in Kenya. It seeks to analyze the sustainability of public domestic debt in Kenya using historical data of 1980-2011. Public debt sustainability is about good housekeeping. It ensures a government does not borrow to pay interest on existing debt. This study adopts two approaches to test for public domestic debt in Kenya. First tests are performed on government debt and secondly on debt ratios. Results show that a one unit increase in previous period's debt leads to 1.45 increase in current public domestic debt. Unit root tests performed indicated that variables are non stationary and confirms that the No Ponzi Game condition which is a necessary condition for public debt sustainability is not satisfied meaning government is creating new debt to repay interest on existing debt. To establish whether the necessary and sufficient condition is met, a cointegration test is carried out between government revenue and expenditure. Results reject a null hypothesis of no cointegration at 5% meaning government revenue and expenditure series are cointegrated. Similar test carried out between public debt and budget deficit shows there is a long run relationship between the two series. We conclude that inter- temporal budget constraint has not been violated and the Kenyan public domestic debt is weakly sustainable.