EXTERNAL DEBT SERVICING AND ECONOMIC GROWTH IN KENYA: FROM 1965 - 2018

Abstract

A developing country like Kenya compliments its revenue through public borrowing. The successive governments have always acquired huge sums of public debt to finance national development plans in Kenya. High levels of public debts require massive debt service which has mixed effects on economic growth. Even as studies indicate mixed effects of public debt servicing and economic growth, the Kenyan government continues to borrow. This study therefore examined the relationship between external debt servicing and economic growth. Data spanning from 1965 to 2017 was used. An explanatory research design was applied. Secondary data obtained from World Bank Sources, Central Bank of Kenya, International financial statistics like the International monetary fund and Kenya National Bureau of Statistics was used for analysis. Data was analyzed using EVIEWS version 7.2. The findings indicated that association between debt service and economic growth was negative and significant. The study concluded that the association between debt service and GDP is negative and significant. This implies as the government channels more of its revenue to servicing of external debts, it significantly hurts the economy. The study also recommends that the contribution of external debt servicing to economic growth in Kenya is 56%. The study recommends that prudential fiscal management measures are required to avoid an unnecessary increase in overall public debt. A reduction in borrowing will enable the country to use a greater proportion of their tax revenues for investments rather than repaying loans, thereby increasing economic growth.

Key Words: External Debt Servicing, Economic Growth, Kenya