Effect of domestic debt on Kenya’s manufactured exports to Uganda and Tanzania

As the foremost pillar of Kenya’s economy, manufacturing was planned to be a major catalyst for Kenya's economic growth and job creation, targeting to reduce the cost of living and uplift the quality of life through an annual contribution of at least 15% to Gross Domeatic Product (GDP). However, current understanding is limited regarding how different macroeconomic aggregates specifically influence the growth of manufactured exports in the country. This creates a knowledge gap for policymakers, making it difficult to develop appropriate interventions that effectively stimulate the growth of Kenya's manufactured exports. This study, therefore, sought to determine the effect of domestic debt (DMD) on Kenya’s manufactured exports to Uganda and Tanzania between 2007 and 2018. This study was grounded in Linder’s hypothesis of trade and employed the gravity model. The study employed a correlational design and utilised secondary panel data from the World Bank, Central Bank of Kenya, Kenya National Bureau of Statistics, and Kenya Export Promotion and Branding Agency. The Hausman test was used to select the random effect models. The results for Kenya’s exports to Uganda and Tanzania indicated that the effect of DMD was negative and significant (β4 = -0.207, p-value 0.002< 0.05). The findings were according to theoretical expectations. The findings can be explained by the phenomenon whereby domestic debt financing displaces private investment. This study therefore recommends that the Government of Kenya observe fiscal discipline according to the provisions of the PFM Act, 2012, Section 15 (1) (c) by investing resources generated from domestic debt in development projects and restricting domestic borrowing by exploring cheaper long-term credit from foreign sources.