The Impact of High and Increasing Public Debt on Economic Growth of Kenya

Abstract

This study was carried out to establish the relationship between high and increasing public debt and economic growth in Kenya. It used quarterly data from 2008 to 2018 from World Development Indicators and Kenya National Bureau of Statistics. The Gross Domestic Product is the proxy for economic growth. The explanatory variables are external debt, domestic debt and debt service payments. Since the data was time series the augmented Dickey Fuller Unit Root test was used to ascertain stationarity. The econometric technique of Ordinary Least Square (OLS) was employed in the data analysis. The data analysis tool was E-views. The results showed that CBK Overdraft (B = - 0.00105), Treasury Bonds (B = - 0.00107), Treasury bills (B = - 0.00108) and commercial bank advance (B = - 0.00114) have a negative and significant effect on economic growth of Kenya (Prob < 0.05). However, domestic debt (B = 0.00108), external debt (B = 0.00000*) and debt service (B = 0.00000*) are positively related with economic growth but only domestic debt (Prob < 0.05) has a significant effect on economic growth. The study concluded that in the last decade domestic borrowing instruments that is Treasury Bills, Treasury Bonds, CBK Overdraft, Commercial Bank Advances and overall Domestic Debt, External debt and Debt Service account for up to a third (36.8 percent) of the variation in economic growth of Kenya while other factors explain the remaining percentage. The study also concludes that domestic borrowing through CBK Overdraft, Treasury Bonds, Treasury bills and commercial bank advance severely and significantly hinders economic growth. This is due to crowding out of the private sector denying investors‟ money for investment. Another conclusion is that domestic debt, external debt and debt service are positively related with economic growth. But only domestic debt as a whole has a significant effect on economic growth. This demonstrates that while the effect of debt service and external debt is not significant, local borrowing under manageable levels can spur economic growth. In light of the results and conclusions from the study, in light of the results and conclusions discussed in the foregoing paragraphs, it can be recommended that the Kenyan government policy makers should adopt an optimal balance in borrowing both locally and externally in order to spur economic growth. Even though the effect of external borrowing was insignificant given a short time period, instruments of domestic borrowing such as treasury bills, CBK overdrafts, commercial banks advances and treasury bonds were detrimental to the economy thus, the government should manage borrowing through these instruments since they have the potential of crowding out the private sector. There is also a need to have prudential fiscal debt management policies so as to manage the increasing debt rates. Reduced borrowing would coarse the government to exploit their tax revenue efficiently in investment and not repayment of debts thus encouraging an improvement in economic growth. This is because as the economy grows, debt servicing is equally growing.