INFLUENCE OF PUBLIC DEBT ON ECONOMIC GROWTH IN KENYA: AN EMPIRICAL ANALYSIS

Abstract

Many countries find themselves in positions of fiscal deficits that require them to seek financing from various sources either internally or externally to bolster improvement and advancements in the economy. However, the choice of employing such financing, and to what extent demands to be at levels deemed sustainable and in close tandem with the government’s budgetary needs, fiscal and public debt policies. In this regard, policymakers in national governments, monetary authorities, and international policy organizations, together with technocrats and other non-state actors need to understand the influence that public debt present fair and square of development in the economy so as to calibrate effective debt policies that balances the suitability of using deficit financing to bolster economic growth. The study therefore determined the influence of public debt on the upheld development of the Kenyan economy. A non-experimental, correlational research design approach was adopted in the assessment. Secondary time series data ranging from 1999 to 2019 was used to empirically analyze study variables. Vector Autoregression (VAR) estimation technique for a linear time series regression model and the Johansen’s multivariate cointegration test were performed to assess the short run and long-haul influence of public debt on economic growth. The results of vector autoregression (short-run) estimation between public debt and economic growth showed that the first lag of public debt on economic growth (PD, L1 = 0.620) was not as significant as compared to its second lag at 10% significance level (PD, L2 = 0.074), leading to the conclusion with 90% significance level that only the second lag of deficit financing has a causal influence on economic growth in the short-run. However, the presence of cointegration in the model variables concluded a long-run association between public debt and economic growth in the time series, implying that the variables are connected and can be consolidated in a direct design in the context of Kenya. These findings birthed the policy recommendations that the utilization of debt financing ought to be viewed as just if the normal result of debt usage will result in expanded economic and production activities intended to help various sectors of the economy which yield the highest returns. That Public Debt Management Departments ought to favor the utilization of greater amount of bilateral and multilateral advances and less of commercial loans to forestall expanded public obligation administration from watering down the feasible development paces of the economy and finally; Policy makers ought to consider focusing on the allocation of public debt to areas generally useful to improvement of the public economy to produce speedy and adequate returns in term of higher economic growth rates in order to cover the public debt.

Key Words: Public Debt, Pubic Debt Service Cost, Nominal GDP, Kenya