Impact of Public Debt on Private Investment in Kenya

This study investigates the effect of public debt on private investment in Kenya using a causal effect research design of time series data of 43 years (1978 — 2020). Private investment plays a crucial role in economic growth by fostering employment, capital accumulation, and technological advancement. Private investment is extremely important to growth, development, and employment. Excessive borrowing, however, results in debt accumulation which retards the pace of sustainable economic progress. Kenya is one of the most highly indebted countries in Africa. Statistical software SPSS and E-Views packages were used for data analysis. As a result, based on an error correction model, external debt, internal debt, and debt interest rates have a statistically significant negative effect on private investment. Concretely, every additional unit of external debt induces a decrease of 0.012410 units in private investment, and every additional unit of internal debt leads to a reduction in private investment by 0.057316 units. Also, debt interest has a negative effect on private investment, whose impact is 0.010017. The results of this study indicate that excessive public debt crowds out private investment by raising its liability for interest and diminishing funds available for the private sector. The results indicate that in Kenya, rising public debt has been detrimental to private investment and that there is a need for prudent borrowing and sound fiscal policies. To cushion the effects of these conditions, the government should focus on debt sustainability, expand the tax base and encourage fast growth of the private sector through the promulgation of favorable policies and provision of investment incentives. Investor confidence and long-term economic stability will be strengthened through mechanisms for strengthening institutional frameworks and fiscal transparency. Transparency in fiscal policies and improving the outlook of institutional aspects will increase investor confidence as well as growth. With this recommendation in place, Kenya will balance their debt with the need for investment in the private sector hence balancing economic growth and development.