The Relationship Between Public Investment To GDP Ratio And External Debt Stocks In Kenya
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Debt is a two-edged sword. External borrowing for productive investment is associated with macroeconomics stability, increased domestic savings, improved welfare and enhanced debt repayment ability; while over accumulation of debt is associated with increased repayment and debt-service costs, depressed domestic investment, crowding out of private investment and increased vulnerability to debt crisis. The paper sought to establish the relationship between public investment to GDP ratio and external debt in Kenya over the period of 1972-2012. The study used time-series data for public investment, GDP, and external debt from IMF International Financial Statistics database. All data was evaluated, cross-checked, compared and critically analyzed. To ensure that the data does not violate the assumptions of classical linear regression model (CLRM) and test for stationarity, the study tested for unit tests using Augmented Dickey-Fuller (ADF). To test for the verifiability of the estimated long run model, additional diagnostic tests, notably: heteroskedasticity, autoregressive conditional heteroskedasticity (ARCH), autocorrelation and normality, were carried out before regression was used to determine the relationship between external debt and inflation. The gauge the relationship between the external debt and growth in Kenya, a simple open macroeconomic debt growth model will be applied. Regression analysis of Ordinary Least Squares (OLS) will be used to determine the relationship between public investment to GDP ratio and external debt over the 1972 and 2012 period in Kenya. The correlation findings indicated a Spearman's correlation coefficient of -0.5618 with a P value of 0.0001, implying a negative and significant correlation. The regression results show an R square of 0.0067 indicating that 0.7 percent of variations in external debt are explained by variations in total
investment/GDP ratio, F statistic of 0.26 and a p value of 0.1828. The study recommends sustaining lower inflation rates through tight fiscal and monetary policies, financing of budget deficit from noninflationary sources, implementation of price stabilization program by subsiding basic food items, and effectively managing external debt.
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