The Influence of fiscal policy instruments on the level of public debt in Kenya

Kihara, Peter Irungu
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Strathmore University
Many researchers have had interest in conducting studies on the rising level of public debt. This is mainly attributed to the fact that although debt avails massive resources to an economy it accumulates over time and leads to a rise in debt servicing burden. If the borrowing is not well managed, it brings negative repercussions to the economy since more resources are used for debt repayment as opposed to being deployed to vital government projects. Although many empirical studies have been done on public debt levels, not many have focused on the role of fiscal policy in debt management. Fiscal policy is a key factor that is theoretically expected to influence the country's public debt level. The government utilizes this tool to stimulate the economy by varying the levels of spending and revenue. This study sought to establish how fiscal policy influences the level of Kenya’s debt. The independent variables were the fiscal policy instruments as characterized by government expenditure, taxation and balance of payment. The level of Kenya’s public debt was the response variable which was the core focus of the study. It was given by the change in total public debt on a quarterly basis. Secondary data was collected for 20 years (January 2000 to December 2019) on a quarterly basis. A descriptive design was used in the study. A time series model was used in analyzing the variables. Regression of coefficients results showed that government debt expenditure measured as expenditure on infrastructure and levels of public debt was positively and significantly related. Taxation and levels of public debt were negatively and significantly related. The results also showed that balance of payment (as current account deficit) and levels of public debt were negatively and significantly related. The findings of the study will help policy makers understand the implication of the various fiscal policy measures on the level of public debt and therefore help ensure debt sustainability. The government should therefore come up with relevant policies which ensure that the levels of public debt continue to be sustainable. The study recommends the need for policy makers to monitor the prevailing levels of government expenditure and current account deficit while at the same time working to improve the tax revenues collected, since this would go a long way in stabilizing the prevailing levels of public debt.
A Thesis submitted in partial fulfillment of the requirements for the award of the Degree of Masters of Business Administration at Strathmore University Business School
Fiscal policy instruments, Domestic Debt, Fiscal Deficit