Effect of Government Borrowing on Private Investment in Kenya

Abstract

Kenya has experienced a consistent increase in borrowing by the government to finance an ever increasing budget. However, the focus of government borrowing in Kenya has shifted from external to domestic markets including commercial banks and pension funds. This increased domestic borrowing by Kenyan government has resulted into debates among policy makers since lending institutions have preferred to lend to the government as opposed to the private sector. It was therefore important to determine the interaction between government debts and private investment in Kenya. The adopted design was descriptive and quarterly data was gathered over a time year period (2009-2018). The information collected was analyzed using SPSS tool with help of means, standard deviation, and correlation and regression analysis. It was shown that government borrowing and interest rate as control variable significantly predict private investment. The study concludes that government has mixed but significant effect on private investment based on whether it is domestic or external borrowing. The study recommends the need to have a ceiling on the maximum external debt that the government should borrow. There is need for effective monetary and fiscal policies by the Central Bank and the National Treasury to stabilize the fluctuations in inflation rates hence boosting private investment. The conceptual limitation of this study was informed by the fact that it focused on bringing out the interaction between government borrowing and private investment. Theoretically, the study was limited to Crowding out Theory, the Ricardian Equivalence Theory and the Keynesian theory. Methodologically, the study used secondary sources of information that was gathered on a quarterly basis over a ten year period (2009-2018). The study recommends further research to be conducted on say foreign direct investment aside from private investment which is more broad and general. Further research is also required across the member countries of say East Africa Community (EAC) for comparative purpose. It is important for further studies to be conducted in emerging economies like Somalia and the advanced economies like USA for the sake of comparison of the results. Such comparative studies should employ more advanced and complex methods of analysis including the use of time series as well as panel data methodologies since the data involved shall be so huge.