ABSTRACT

Public debt remains one of the most critical elements of economic development especially in developing countries. This study focuses on the public debt in Kenya and its effect on economic growth. Most developing countries will expect that public debt will affect the economic growth positively. Thus the resources from public debt should be used to finance government expenditures which will spur economic growth of the country. There is a considerable increase in domestic debt as compared to external debt raising concerns on its effects on investments in Kenya. However, the empirical study indicates the contrary. The study is also aimed at determining whether increase in domestic debt affects economic growth in Kenya. The study was based on Barro growth regression that applies a vector of inputs in production of economic growth status. Longitudinal research design was adopted whereby published quarterly secondary data from the year 2000 to 2003 was analyzed. The findings of the study indicated that the public debt has led to increased economic growth and increased investment. The results obtained from the study indicate that the coefficient associated to public debt is positive and is equal to 2.05. The implication of this is that increase of public debt by one per cent improves Gross domestic product by 2.05 per cent in short-run. On the other hand, domestic debt is statistically significant at 5 per cent level of significance. The coefficient associated to domestic debt is negative and is equal to -1.60. The implication of this is that increase of domestic debt by one per cent decreases Gross domestic product by 1.61 per cent in short-run. Thus domestic borrowing should be discouraged in favour of external debt.