The Determinants of Kenya’s External Debt Sustainability

Abstract

Many developing countries rely heavily on external debt and as a result a group of low income countries classified as Highly Indebted Poor Countries (HIPCs) have continued to experience difficulties in managing and servicing their huge stocks of external debt. Most of these countries including Kenya are in sub-Saharan Africa. The relatively high level of Kenya’s external indebtedness and rising debt burden has serious implications on the country’s development and debt sustainability. Kenya has relied much on foreign debt to finance its budgets. To date, this dependence on external resources has become entrenched in financing government projects and operations in the country which has led to an increase in the stock of external debt. This debt has been rising over the years and the question is, will it be sustainable? This paper therefore examines the determinants of Kenya’s external debt sustainability. The findings of the study indicate that Kenya’s external debt sustainability is determined mainly by exports, GDP, domestic debt and external debt. External debt accumulation has been rising over the years with debt burden indicators increasing steadily in the early 1990s. Using time series data for the period 1967-2011, the empirical results indicated strong positive relationship between external debt sustainability, exports and GDP and the findings further reveals that there is a negative relationship between external debt sustainability ,domestic debt and external debt. Some policy implications emerge from the study. To enhance Kenya’s external debt sustainability the government must increase its GDP and exports as this will lead to increase in external debt sustainability.