Does Public Debt affect Private Investment in Kenya? ARDL Approach

International Journal of Research and Innovation in Social Science (IJRISS) | Volume IV, Issue VII, July 2020 | ISSN 2454–6186

Does Public Debt affect Private Investment in Kenya? ARDL Approach

Pollyne Mbithe Mutunga
Machakos University, Machakos, Kenya

Abstract:- Private sector investment plays a critical role towards economic growth and development. Private sector provides employment opportunities to almost 80 percent of Kenyan, pays revenue to the government in form of taxes and fees, and accounts for 50 percent of the GDP. Since 2013, Kenya’s appetite for public debt has growth rapidly and this has elicited public debate on the effect of such debts on private investment. However, literature on this issue remains scanty and inconclusive. The study adopts Autoregressive Distributed Lag Model to respond to the question, “How does Kenya’s public debt affect private investment? The study employed time series data covering 1980-2019. The finds that domestic debt has negative effect on private investment only in the short-run. Similar findings are observed with inflation. In addition, external debt crowds out private investment in the long-run and finally, debt service has adverse effect on private investment in both short and long-run. The study recommends better debt management practices as a remedy to the negative effects.

Key Words: Public Debt, Private investment, ARDL, GDP, External debt, Domestic debt.

I. INTRODUCTION

Sustainable economic growth remains a key agenda of any country across the world. Welfare of citizens is hinged on the performance of the economy. Saunweme & Mufandaedza (2013) opines that sound macroeconomic policies focusing on private and public investment is the key to unlocking the untapped potential of an economy towards movement towards the steady stead. Low levels of capital formation due to insufficient savings in developing countries like Kenya has become a threat to both public and private investments. As a result, Kenyan government resorted to borrowing both internally and externally to finance budgetary deficits which are now a common phenomenon. However, the surge in the Kenya’s debt stock for the last ten years has become a course for worry among many Kenyans especially, its implications on both private and public investments. As at March 2020, Kenya’s public debt stood at Kshs. 6.28 trillion with 0.7 ratio to GDP. This imply that the country has a huge debt servicing obligation that is likely to compromise both public and private investments, and hence, economic growth.

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