Effect of Interest Payments on External Debt on Economic Growth in Kenya

TL;DR

This study investigates how rising interest payments on external debt impact Kenya's economic growth, revealing a significant negative relationship and emphasizing prudent borrowing strategies for policymakers.

Contribution

It provides empirical evidence linking external debt interest payments to GDP growth in Kenya, highlighting the importance of sustainable borrowing practices.

Findings

Interest payments negatively correlate with GDP growth.

The model is statistically significant.

External debt interest payments are good predictors of economic performance.

Abstract

In Kenya, interest payments on external debt have been increasing from 2010 to 2015, while GDP growth experienced a slight decline over the same period. Policymakers are concerned that the rapid increase in external debt in developing countries such as Kenya has the potential to erode the country's sovereign rating, particularly if it is not supported by proportionate growth in the size of the economy. The purpose of this study was to investigate the effect of interest payments on external debt on economic growth in Kenya. The study utilized secondary data for 25 years, from 1991 to 2015, for GDP growth and interest payments on external debt. The results from the analysis of variance statistics indicate that the model was statistically significant. This implies that interest payments on external debt are good predictors of GDP growth. Regression coefficient results show that GDP growth and the logarithm of interest payments on external debt are negatively and significantly related. The study recommends that future government plans should ensure that external borrowings are taken at rates not higher than the interest rate payments.