Effect of External Debt on Economic Growth in Kenya: Vector Error Correction Model (VECM) Approach

Abstract

The study examined relationship between external and economic growth in Kenya from 1980-2017. The study embraced the VECM to analyze data. "The variables in the research comprised of RGDP, "Bilateral Debt (BLEDT), Multilateral Debt (MLEDT) and Suppliers Credit (SCRDT). The outcome exhibited that Bilateral Debt (BLEDT) Multilateral Debt (MLEDT) have negative relation with GDP growth in Kenya both in the short- run and long- run. On the other hand, suppliers Credit (SCRDT) has a positive relationship with GDP growth in Kenya in the long-run and in the short-run, it has insignificant relationship with GDP growth in Kenya under the period of study. There is causal relationship among variables, there is unidirectional causality running from RGDP to BLEDT and there is unidirectional causality running from RGDP to SCRDT.

From the findings, the study suggests that the government should maintain sustainable level of external debt in order to achieve desirable level of GDP growth. The external debt obtained by the government should be allocated strictly to capital projects such as infrastructure development.