Effects of Government Borrowing on Private Investments in Kenya

Caspah Lidiema^1,

¹Department of Economics, Accounts, & Finance, Jomo Kenyatta University of Agriculture and Technology

Cite this paper:
Caspah Lidiema. Effects of Government Borrowing on Private Investments in Kenya. Journal of Finance and Economics. 2018; 6(2):49-59. doi: 10.12691/jfe-6-2-3

Abstract

This study analyzes the effect of government domestic borrowing on private investment using Gross fixed capital formation as a dependent variable. The study uses the data from 1975 to 2014 of Domestic debt, financial development, gross domestic savings, real interest rate and GDP per capita. The Auto Regressive Distributed Lag (ARDL) technique was used to find the long-run and short-run Co-integration relationship of the model between the independent variables and Gross fixed capital formation. Stability functions also tested using CUSUM and CUSUMSQ. The results show that Domestic Debt has a negative and significant relationship with Gross fixed capital formation even though this relationship diminishes in the long run. Financial Development (FD) proxied as Domestic credit to private sector has positive and significant relationship with gross fixed Domestic capital formation in Kenya in short run and long run. This suggests that an increase in increase in Domestic credit to private sector leads to increase investments in Kenya. These results confirm that excessive domestic borrowing by the government can negatively affect investment and eventually hurt the economy. If this persists Kenya’s economy can be hurt eventually affect the future investment and economic growth. This means government need to come up with policies to govern domestic borrowing and interest rates and also come up with policies that encourage financial development through boosting Small and Micro enterprises lending to encourage local investment.

Keywords:
Government Borrowing Gross Domestic Savings real interest rate. Domestic Private Investment ARDL

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