The Impact of cash management and other determinants on short term domestic debt in Kenya
Date
2020
Authors
Ireri, Michael Njeru
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
This research sought to determine the impact of the Kenya’s National Treasury cash management policy being implemented by the National Government on the short-term domestic debt. It also sought to analyze other determinants of short-term domestic debt. Using a time series monthly data from January 2010 to June 2019, and a dummy variable to differentiate the period when the cash management policy was introduced and implemented (one,1) and the period before it was implemented (zero,0), results of stationarity dictated the use of Autoregressive Distributive Lag Bound Test model as the variables of interest were either integrated of order zero, I(0) or order one, I(1). We also carried diagnostic and stability tests which confirmed no serial correlation in the series as well as stability of the model. The results show that over the period of analysis, the average bank overdraft has been Kshs27.11B; total cash holdings, Kshs191.98B; exchange rate stood at Kshs92.59 per US dollar; GDP growth rate was 5.14%; inflation rate, 7.25%; interest rate, 15.64% and treasury bills stood at an average of Kshs 376.78B. The ARDL Bound Test confirmed the existence of cointegration when bank overdraft was used as the dependence variable implying existence of long run relationship, further justifying the use of restricted Error Correction Model (ECM). The evidence in this study supports the view that in the long run, previous and current cash management affects bank overdraft positively while previous and current exchange rate affects bank overdraft negatively. In the short-run dynamics, previous and current cash management, inflation and exchange rate affects short-term debts in Kenya. As depicted by these results, past data and behaviors in dealing with interest rates, cash management, inflation and treasury bill affect current short-term debt. The dummy variable is found to be significant and has a positive coefficient with the two measures of short-term debt, implying that introduction of cash management policy by the National Treasury plays a vital role in the management of short-term debts in Kenya. The higher the amount of the idle cash held by national and county government, the higher the appetite for short term-debts. The error correction term (ECT) illustrating the speed of adjustment has a coefficient of 0.60 implying that there is about 60% feedback from the previous period into the short run dynamic process. In terms of policy recommendation, the National Treasury’s objective of Cash Management implementation should be encouraged with focus on mopping idle cash held at end of day by MDAs; and continued macroeconomic stability pursuit by ensuring stability in the interest, inflation and exchange rates.
Description
Submitted in partial fulfilment of the requirements for the degree of Master of Public Policy and Management at Strathmore University
Keywords
Cash management, Short term domestic debt, Macroeconomic stability