EFFECT OF PUBLIC DEBT SUSTAINABILITY ON ECONOMIC STABILITY IN KENYA

Abstract

Kenya’s rising public debt raises concerns about its impact on economic stability. Reliance on domestic and foreign borrowing for infrastructure development poses risks to fiscal sustainability and long-term stability. High debt servicing obligations divert resources from essential sectors like healthcare and education. With a significant portion of the national budget allocated to debt servicing, Kenya faces a "debt trap," limiting fiscal space and the ability to respond to economic shocks. A knowledge gap exists in understanding the precise relationship between public debt sustainability and economic stability in Kenya, particularly regarding how debt indicators such as the debt-to-GDP ratio, debt service ratio, and debt maturity structure impact fiscal health. This study therefore sought to examine the effect of public debt sustainability on economic stability in Kenya. The specific objectives were to examine the effect of debt-to-GDP ratio, debt service ratio and debt maturity structure on economic stability in Kenya. The study also sought to examine the moderating effect of government fiscal policy on the relationship between public debt sustainability and economic stability. The study adopted a causal research design. Secondary time-series data was used in the present study and was collected by use of a data collection checklist. Data on public debt sustainability, budget deficit/surplus and economic stability was obtained from the Central Bank of Kenya, Kenya National Bureau of Statistics (KNBS) and The World Bank. Analysis of the quantitative data was based on descriptive and inferential statistics. Descriptive statistics focused on computation of mean, percentage, standard deviation and frequencies. Inferential statistics focused on calculation of correlation and multivariate regression analysis. Correlation analysis was used to determine the strength of the association between dependent and independent variables while regression analysis was used to determine the weight of the relationship between the independent variables and the dependent variable. Hypothesis testing involved comparing the p-value with the significance level (typically set at 0.05). Diagnostic tests were performed to test for the regression model assumptions before carrying out regression analysis. The R-squared was 0.7240, indicating that approximately 72.40% of the variation in economic stability is explained by the independent variables, namely debt-to-GDP ratio, debt service ratio, and debt maturity structure. The study found that debt-to-GDP ratio negatively and significantly impacts on economic stability in Kenya (p-value= 0.014). In addition, debt service ratio positively and significantly impact on economic stability in Kenya (p-value = 0.013). Moreover, debt maturity structure positively and insignificantly impact economic stability in Kenya (p-value = 0.177). Also, government policy moderates the relationship between public debt sustainability and economic stability in Kenya (p=value=0.000). The study concludes that in Kenya, debt-to-GDP ratio undermines economic stability, debt service ratio has a positive effect, debt maturity is insignificant, and government policy moderates the debt-stability relationship. The government should enhance economic stability in Kenya by controlling public borrowing, expanding revenue sources, prioritizing long-term debt instruments, prudently managing budget deficits, investing in high-impact sectors, and adopting innovative financing mechanisms such as public-private partnerships and green bonds to ensure sustainable debt and inclusive growth.