The Impact of External Debt Servicing on Capital Formation and Gross Domestic Product in Kenya


  • Francisca Ndoti Kenyatta University
  • Julius Korir, Ph.D. Kenyatta University


This study examined the effect of foreign debt service on GDP in Kenya through savings and capital formation transmission channel. The specific objectives of the study were; to determine the effect of external debt servicing on capital formation in Kenya, and establish the effect of external debt servicing on economic growth in Kenya. Longitudinal research design was adopted where time series data on external debt, capital formation was analyzed. Time series properties of the data was checked in terms of stationary tests, and the standard diagnostic tests of regression such normality, autocorrelation, multicollinearity and specification. Regression of capital formation on lagged debt service was carried out which indicated negative relationship between the two variables. Regression of gross domestic product on labour and predicted capital was done, the results obtained was that, debt service affect  gross domestic product negatively  through its effect on capital formation. It was recommended among others that policies of the government should therefore be guided towards reducing debt stock. It is important for policy makers to be cautious on implementation of projects that raise public debt and there should be controlled measures on debt management profiles especially in government expenditure by evaluating funded projects to gauge the utilization of funds. Also, reducing the rate of borrowing by sourcing alternative means of financing projects was recommended.

Keywords: External Debt Servicing, Capital Formation, Gross Domestic Product

Author Biographies

Francisca Ndoti, Kenyatta University

Postgraduate Student

Julius Korir, Ph.D., Kenyatta University

Lecturer, Department of Economic Theory


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How to Cite

Ndoti, F., & Korir, J. (2018). The Impact of External Debt Servicing on Capital Formation and Gross Domestic Product in Kenya. Journal of Economics, 2(1), 18–33. Retrieved from