INFLUENCE OF SYSTEMATIC RISK ON PUBLIC DEBT LEVELS IN KENYA

Abstract

In the 21st century, many nations around the world are faced with a combination of fragile economic growth, high levels of national debt, and budget deficits. Although the majority of this debt increase may have been as a result of efforts to stimilate economic development after the effect of the economic recession, it is imperative to conduct a comprehensive econometric analysis to determine the underlying factors contributing to the increase in government debt. A growing concern is the comprehensive analysis of debt dynamics and debt overhang.Therefore, the purpose of this study was to determine the influence of systematic risk on public debt in Kenya from 2005 to 2023. Specifically, the study sought to; examine the influence of inflation risk on the public debt in Kenya; evaluate the influence of interest rate risk on the public debt in Kenya; determine the influence of currency risk on the public debt in Kenya; determine the influence of liquidity risk on the public debt in Kenya. The study employed quantitative approaches to empirical study the relation to independent variables and the dependent variable. A longitudinal and correlational design was used since it employed time series data to establish a relationship between the systematic risks and the national debts without manipulating the variables. The study used secondary data extracted from economic indicators and statistical abstracts from the respective ministries, Kenya National Bureau of Statistics (KNBS), CBK, IMF and the World Bank during the period under study. Data was analyzed and presented in figures and tables. The study findings provided policy framework for national debts in Kenya. The study finding of the study will be of great importance to the government in development of strategies and policies that will help in minimizing the systematic risks that increases the national debt hence proper management of the national debt. The ordinary least square regression R2 value of 0.8001 and the adjusted R2 of 0.743 confirms that the model has a strong impact.The findings for correlation analysis reveals significant relationships between public debt levels and systematic risk variables. Inflation risks (r= 12.6151, p= 0.0001), indicating that inflation rates are associated with high public debt levels. The interest rate risk is positively correlated with public debt levels (r= 0.09811, p= 0.05), implying that interest rate risk influences an increase in public debt levels. Currency risk is positively correlated with public debt levels (r= 9.714, p= 0.000), suggesting that currency instability influence high debt levels creating uncertainty that undermines Countries stability. Liquidity risk is positively correlated with public debt levels (r= 0.7387, p= 0.003), indicating that while liquidity risk influences public debt levels positively it will lead to cautious measures on accessing more debts. Therefore, the study concludes that stability of systematic risk characterized by lower inflation, interest rate risk, currency risk and liquidity risk is critical for influencing the public debt levels in Kenya. The study recommends that the government should implement both fiscal and monetary policies to control inflation tendencies. This would create an enabling environment for repayment of public debt in the Country. The regulators should ensure interest rates remain lower and stable to encourage investment of borrowed fund in the Country. There is a need for the government to manage currency risk prudently through hedging against risk through currency swaps and enhancing economic stability. The government should have a balanced budget that would not put the Country in liquidity challenges that may lead to overborrowing.