THE EFFECT OF PUBLIC DEBT ON ECONOMIC GROWTH IN KENYA

Wanjuki Njiru Ngugi

Student/Kenyatta University

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Kenya

Dr.John Karanja Ngugi

Supervisor/Kenyatta University

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Kenya.

Dr.Jennifer Gathoni Njaramba

Supervisor/Kenyatta University

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Kenya.

CITATION: Ngugi, N., W., Ngugi, K., J., Njaramba, G., J. (2016). The Effect of Public Debt On Econonic Growth in Kenya. International journal of Economics and Finance. Vol. 5 (9) PP 11- 43

ABSTRACT

The study investigates the effect of public debt on economic growth in Kenya, between 1980-2013.The choices of period was guided by data availability and escalation of Kenya’s public debt. The main problem is that, Kenya government has been relying heavily on public debt, aid and grants as a source of finance. This has resulted to a buildup of the level of public debt stock which has led to funds being diverted to debt servicing at the expense of economic development and domestic consumption. The specific objectives for the research were to assess the effect of external debt on economic growth in Kenya, to determine the effect of domestic debt on economic growth in Kenya and to find out the effect of other macro economic factors on economic growth in Kenya. Times series regression model has been used to determine the effect of public debt on economic growth in Kenya and data was analyzed using E-views 8. Various tests were carried out to test for stationarity, normality, autocorrelation, heteroscedasticity using the same software package. The data series used were stationary at integrated order level zero as given in the KPSS results. The coefficient  of  determination  (R2)  indicated  that  about  82%  of  change  in  GDP was accounted  for  by  the  explanatory  variables  while  the  adjusted  R-square  of  73%  further justified this effect. Public debt servicing, domestic debt , real interest rate, inflation and a lagged PIGR affected the growth of the GDP negatively while external debt, real exchange  rate, lagged GDP and  private investment affected growth of the GDP positively. This study recommends that public borrowing (government) from international markets and domestic debts should be contained since it has led to high cost of borrowing and crowding out of the private sector.

Keywords: Crowding out effect, Debt Overhang effect, Domestic debt, External debt and Total debt servicing.

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