Discussion Paper No. 196 of 2017 on Macroeconomic Determinants of Public Debt Accumulation in Kenya

Abstract

The high and continuous increase in public debt, alongside its servicing burden, is increasingly impeding Kenya’s efforts in achieving a sustained economic growth rate of 10 per cent per annum as conceived in the Kenya Vision 2030. This burden calls for the need to determine the perceived macroeconomic determinants of public debt accumulation in Kenya. This study attempted to establish and evaluate those macroeconomic elements that give rise to public debt accumulation in Kenya. Whereas such macroeconomic elements can be classified into domestic and external factors, they are actually interlaced. The external factors impinge on what happens domestically and vice versa. The study analyzed the role of some of the macroeconomic variables in determining debt accumulation in Kenya from 1975 to 2015. It attempted to establish the quantitative relationship between public debt as a percentage of GDP and some major internal macroeconomic variables (Gross Fixed Capital Formation, Interest Payments on the Debt, Real Growth Rate of GDP, Real Interest Rate and Savings Gap) and also external factors (Exchange Rate, Trade Openness and Foreign Direct Investment).