EFFECT OF PUBLIC DEBT, EXPORT TO GDP RATIO AND GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN KENYA

Abstract

An investigation into the growth of GDP and public debt in Kenya shows that during the period 1963 to 2008, the economy experienced cyclical booms and depressions with the economic booms in mid 1970s, late 1980s, and early 2000s, as well as global economic depressions in early 1980s, early 1990s and in 2008. As a result, the Kenyan government turned to external and domestic borrowing during these periods to plug the budget deficits, which has contributed immensely on the country negatively and this has led to high dependency ratio as compared to the previous years. The study sought to assess the effect of domestic borrowing, external borrowing, export to GDP ratio as well as government expenditure on economic growth in Kenya. The study was anchored on the Keynesian theory of economic growth and the dynamic theory of public spending to establish the effect of public debt on Kenya’s economic growth by conducting longitudinal research design on quarterly secondary time series data from the treasury for the period 1988-2018. The study employed the autoregressive distributed lag (ARDL) regression model to carry out analysis using STATA version 15 software at five percent significance level. The study found that there exists a significant inverse short-term relationship between economic growth and domestic debt where one percent increase in domestic debt causes 1.25 percent decline in Kenya's economic growth (β =1.25342, p < 0.05). The findings of the study shows that one percent increase in external debt causes 1.10 percent decline in economic growth in Kenya (β =1.09536, p < 0.05), and 1.745 positive relationship between export to GDP ratio and economic growth in Kenya (β =1.74536, p < 0.05) whereas government expenditure has a significant short-run, positive relationship with economic growth in Kenya with a correlation coefficient of 1.4537 β =1.493762, p < 0.05. The study concluded that Kenya's economic growth is significantly correlated with all four explanatory variables. Based on the study findings, it was recommended that to ensure a steady economic growth in the country, both external and domestic debt stocks should be kept at manageable levels, while government expenditures remain sustainable.