THE EFFECTS OF PUBLIC DEBT ON PRIVATE INVESTMENTS AND ECONOMIC GROWTH IN KENYA (1980-2013)

Abstract

The Kenya Vision 2030 aims at achieving a 10 percent per annum growth rate in the economy. Investments have been identified as a major channel through which this objective can be met. The government has undertaken various public investments to fuel economic growth. However, for this to be even more effective, private investments have to be taken into consideration. The government has taken various measures such as relying more on external debt to avoid crowding out private investments and consequently promote economic growth. Despite these efforts, private investments and economic growth have remained low. This study aimed at finding out the effect public debt on the level of private investment and economic growth in Kenya. The study used time series data from 1980 to 2013. Granger causality test was used to determine the direction of causality between public debt and private investments and also between public debt and economic growth. Ordinary least squares estimation was used in the estimation of the model. Granger causality tests also show the presence of unidirectional causality from debt to private investments and GDP growth. Debt was found to have a negative effect on private investments and a positive effect on economic growth. This suggests that debt plays a huge role in determining the level of private investments and also the level of economic growth.