The Impact of External Debt Servicing on Capital Formation and Gross Domestic Product in Kenya
Abstract
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
References
Burnside, C., & Dollar, D. (2000). Aid, policies, and growth. American economic review, 90(4), 847-868.
Cecchetti, S. G., Mohanty, M. S., & Zampolli, F. (2011). The real effects of debt.
Dowling Jr, J. M., & Hiemenz, U. (1983). Aid, savings, and growth in the Asian region. The Developing Economies, 21(1), 3-13.
Gupta, K. L., & Islam, M. A. (1983). foreign Capital. Savings and Growth.
Hansen, H., & Tarp, F. (2001). Aid and growth regressions. Journal of development Economics, 64(2), 547-570.
Khan, N. Z., Rahim, E., & Mahmood, Z. (1993). Foreign Aid, Domestic Savings and Economic Growth (Pakistan: 1960 to 1988)[with Comments]. The Pakistan Development Review, 32(4), 1157-1167.
Maana, I., Owino, R., & Mutai, N. (2008). Domestic debt and its impact on the economy–The case of Kenya. In 13th Annual African Econometric Society Conference in Pretoria, South Africa from 9th to 11th July.
Matiti, C. (2013). The Relationship Between Public Debt And Economic Growth In Kenya, International Journal Of Social Sciences And Project Planning And Management, 1 (1 ), 65-86.
Meade, R. H. (1996). River-sediment inputs to major deltas. In Sea-level rise and coastal subsidence (pp. 63-85). Springer, Dordrecht.
Mosley, P. (1980). Aid, savings and growth revisited. Oxford Bulletin of Economics and Statistics, 42(2), 79-95.
Pattillo, C. A., Poirson, H., & Ricci, L. A. (2002). External debt and growth (No. 2002-2069). International Monetary Fund.
Reinhart, C. M., & Rogoff, K. S. (2010). Growth in a Time of Debt. American Economic Review, 100(2), 573-78.
Reinhart, C. M., Reinhart, V. R., & Rogoff, K. S. (2012). Public debt overhangs: advanced- economy episodes since 1800. Journal of Economic Perspectives, 26(3), 69-86.
Rusike, T. G. (2007). Trends and determinants of inward foreign direct investment to South Africa (Doctoral dissertation, Rhodes University).
Solow, R. M. (1956). A contribution to the theory of economic growth. The quarterly journal of economics, 70(1), 65-94.
Yadi, H., Burke, S., Madeja, Z., Hemberger, M., Moffett, A., & Colucci, F. (2008). Unique receptor repertoire in mouse uterine NK cells. The Journal of Immunology, 181(9), 6140- 6147.
