Relationship Between Macro-economic Factors and Growth of External Public Debt in Kenya

Abstract

Excessive growth of external debt can constrain a government's ability to implement fiscal policies that promote economic growth and development. Governments may be forced to adopt austerity measures, reduce public spending, or increase taxes to meet debt obligations, which can stifle economic activity. High levels of growth of external debt can crowd out private sector borrowing. Increased growth of external public debt may lead debt servicing burden, may not contribute to economic growth, currency depreciation and increased inflation. The objective of the research was to determine the relationship between macro-economic factors and growth of external public debt in Kenya. The technique of descriptive research was applied for the research. The researcher made use of secondary data that that was available from CBK bank supervision report and which covered a 15- year duration from 2008 and June 2022. SPSS version 22 helped in data analyses and the outcomes were given in form of tables, regressions, correlations, ANOVA and T-test. It was concluded that inflation rate had a negative effect on growth of external public debt. Interest rate had a negative effect on growth of external public debt. Exchange rate had a positive effect on growth of external public debt. GDP growth rate had a positive effect on growth of external public debt while trade deficit had a positive effect on growth of external public debt. Exchange rate, GDP growth and trade deficit had a p values less than 0.05 and indication that the three variables had a significant effect on external debt. Inflation rate and interest rate had p values higher than 0.05 and hence the study didn’t reject their specific null hypothesis of an insignificant effect on growth of external debt. It is recommended that the government should practice prudent fiscal management to ensure that government spending and deficits are kept in check. The government should consider issuing long-term bonds with fixed interest rates when market rates are low to reduce its external debt burden. The government should explore opportunities to renegotiate debt terms with creditors such as lower interest rates and extended maturities to reduce its debt level. The government should try to control its external public debt and only invest in the capital-based projects from the debt so that this may have impact positively on the economic growth and also the development of the country. The government should adopt policies geared towards export promotion to boost exports of goods and services