Domestic debt and private investment in Kenya: 1963-2009
This paper analyzes the increase of domestic debt to GOP ratio and its effect on private investments to GOP ratio in Kenya from 1963 to 2009. Heavy domestic borrowing puts upward pressure on interest rates and consequently private investments. The objectives of this research paper are to examine the factors that influence private investments in Kenya and draw policy implications from the research findings. The independent variables that were used include inflation rate, GOP growth, fiscal deficit, debt service stock of domestic debt and the export government expenditure ratio. The dependent variable was private investments. The data used is secondary data that was obtained from publications like the Kenyan Statistical abstracts, Statistical bulletins and Economic surveys of various years. The regression results after the I st difference showed that the exports government expenditure ratio, debt service and the stock of domestic debt were all significant at 5 percent. The inflation rate, fiscal deficit and GOP growth were insignificant. These variables explained 40.51 percent of the private investment changes. The stock of domestic debt and terms of trade negatively influence private investment. On carrying out the dynamic analysis of the model, the best possible results were achieved after the 2nd lag. The significant variables were the export government expenditure ratio, debt service and the stock of domestic debt. Of which the exports government expenditure and the stock of domestic debt had negative coefficients. The variables explained 59.83 percent ofthe private investment The conclusion therefore is that there is evidence of crowding out effect on private investments in Kenya.