The Impact of Domestic Public Debt on Private Investment in Kenya

Abstract

Kenya’s Public domestic debt reached a level of Ksh 444.7 billion in March 2008. This paper examined the impact of public domestic debt on private investment levels in Kenya over the period 1967-2007. An investment function with four independent variables, namely public domestic debt, GDP, interest rate and public investment was estimated by analyzing the unit root test and co-integration test. The unit root test revealed that all variables under investigation are integrated of order one and are co-integrated in the long-run. The results indicated that high levels of domestic borrowing have negatively impacted on private investment. The results also showed that the impact of public investment on private investment was not as significant as public domestic debt, GDP and interest rate variable suggesting that public investment has not been complementary on private investment. Interest rates have negatively impacted on private investments, while with regard to GDP, economic growth has induced more private investments.  The findings of this paper call for designing appropriate policies that deal with the ever rising domestic public debt and the sale of domestic debt to donors under the Paris Club umbrella. The results have important implications for fiscal management in the context of the country’s crying need to generate faster employment growth, meet the Millennium Development Goals and attain the Vision 2030 goals. Research results are also of significant value to the academia in helping them design other longitudinal studies.

Keywords: Kenya, GDP, domestic debt, private investment