Non-Linear Effects Of External Debt And Their Channels On Economic Growth In Kenya

ABSTRACT

Public debt in Kenya has consistently risen overtime, with larger portion being

debt from external sources. Both positive and negative effects of debt have been

experienced in Kenya since independence. In the last one decade external debt has

been rising sharply relative to economic growth of the country, which seems to be

stagnant overtime. Additionally, the country has been reporting several cases of

corruption and mismanagement of public revenue at different levels of public and

private sectors International Credit Rating Agency has ranked Kenya among the

most corrupt nations (143 out of 180) with a corruption perception index of 28

percent in 2017. Report from International Monetary Fund indicated that Kenya

has exceeded the generally accepted debt to Gross Domestic Product ratio of 50

percent as at February, 2018 by 6.2 percent. Additionally, the credit ratings of the

country has been downgraded from B1 to B2 credit rating, implying that the

country is rated highly speculative and that adverse financial or economic

conditions may render the country inadequate capacity to meet its financial

obligations. Therefore, this study examined the non-linear effect external debt on

economic growth and their channels in Kenya. The objectives of the study

included; first, assessing the non-linear effect of external debt on economic

growth. Secondly, was to examine the non-linear effect of external debt through

the channels influencing economic growth and lastly, to examine the effect of

corruption on external debt in Kenya. Secondary data for the period 1970 to 2017

was collected from Kenya National Bureau of Statistics, the National Treasury of

Kenya, Central Bank of Kenya, World Bank and International Monetary Funds

abstracts. In this context, Autoregressive Distributed Lag was used in estimating

the equations of the respective objectives after conducting the time series property

tests. The empirical results for the study revealed the non-linear effects of external

debt on Kenya’s economy. Additionally, the study established the a non-linear

relationship between external debt and economic growth through investment

channel by showing the existences of a positive effect on investment till a certain

threshold beyond which excess debt causes crowding out of investment. Also, the

study showed a positive effect of external debt on economy through Total Factor

Productivity channel and a negative effect through interest rate channel. Lastly,

the study showed the adverse effect of corruption on external debt in Kenya. The

study concluded that external debt results to a negative effect on the economy if

the government debt exceeds the debt threshold for the country.