An Evaluation of the Effect of Domestic Debt and External Debt on Economic Growth in Kenya

During the period 1963 to 2008, Kenya’s economy went through cyclical booms and depressions. As a result, the Kenyan government turned to external and domestic borrowing to finance the budget deficits. However, this has negatively affected the country - leading to high dependency ratio as compared to the previous years. Therefore, this study assessed the effects of domestic borrowing and external borrowing on economic growth in Kenya for the period between 1988 and 2019. The study was anchored on the Keynesian theory of economic growth and the dynamic theory of public spending. Autoregressive Distributed Lag (ARDL) model was used to analyze data, with the aid of SPSS and STATA. The findings of the study show that 1% increase in domestic debt causes a 1.25 % decline in Kenya's economic growth while a 1% increase in external debt causes a 1.10 % decline in Kenya's economic growth. Results also revealed that there exists a significant inverse short-term relationship between economic growth and domestic debt. These results imply that both domestic debt stock and external debt stock are significantly correlated with Kenya's economic growth. It is recommended that proper debt management need to be done to contain increases in debt level in order to ensure a steady economic growth in Kenya.