The relationship between long-term public domestic debt and private investment: a case study of Kenya

Abstract

This study seeks to determine the impact of long-term public domestic debt on private investment in Kenya over the period 2000 to 2012 using quarterly data. Of particular interest, is whether long-term public domestic debt has a greater impact on private investment than short-term public domestic debt. An investment function with six independent variables-long -term public domestic debt, short-term public domestic debt, external debt , GDP, interest rate and public investment- was estimated by analyzing unit root tests, a co-integration test and a Vector Error Correction Model. The study finds that long-term public domestic debt crowds-out private investment in Kenya, and that its impact is greater than that of short-term domestic debt in the long-run. As such, the findings of this study call for the bolstering-of economic reforms aimed at strengthening public debt management -such as developing a framework to identify and manage the trade -offs between expected cost and risk in the government debt portfolio . The results have important implications for fiscal management as the government raises finances in order to implement flagship projects aimed at attaining Kenya's blue print for elevating Kenya to middle-income status, the Vision 2030.