THE EFFECT OF RISING PUBLIC DEBT IN KENYA ON FOREIGN EXCHANGE RATE
Abstract
Kenya is a growing nation with a continuous increase in its public expenditure. To meet its budget requirement, the Kenyan governments have resorted into heavy borrowing both internally and externally. While the activities taken by the governments may stimulate domestic economy, the large debt may lead to reduced foreign investments. The external debt payments may involve demand for foreign currency, and if the debt is beyond the production capacity of the country it may lead to inflation. If inflation is high, the debt will be serviced with cheaper real dollars affecting the counties exchange rate. However, a country’s currency exchange rate is an important determinant of its economic health as it plays an important role in a country's trade, which is critical to its development. It is towards this back borne that this paper keenly evaluated how the rising public debt in Kenya affects its foreign exchange rate. Monthly secondary data over a study period of 18 year (2001 to 2018) was to show the effect using a trend analysis and a time series regression model. The study scope was justified by the quick increase in the country’s external debt over the past few years. The study found that foreign public debt is positively related to the foreign exchange rate in Kenya. It is therefore important for the government to model the funding of the fiscal deficit by use of a healthy foreign debt that does not affect its foreign exchange rate adversly.
Key words: Kenya; Foreign Public Debt; Foreign Exchange Rate.
CITATION: Obwogi, J. (2019). Impact of rising public debt in Kenya on foreign exchange rate. The Strategic Journal of Business & Change Management, 6 (2), 2550 – 2562.
Full Text:
PDFReferences
Bernheim B. D., (1987) Ricardian Equivalence: An evaluation of Theory and Evidence. NBER Working Paper No 2330.
Central Bank of Kenya, impact of interest arte capping in Kenyan economy, March 2018.Central bank Kenya [KE https://www.centralbank.go.ke/statistics/government-finance-statistics/]
Central Bank of Kenya, Nineteenth Bi-Annual Report of the Monetary Policy Committee. Issued under the Central Bank of Kenya Act, Cap 491 October 2017 https://www.centralbank.go.ke/uploads/monetary_policy_reports/907887845_19th%20MPC%20REPORT%20-%20October%202017.pdf
Churchman N. (2001) Ricardo and Modern Public Debt Theory. In: David Ricardo on Public Debt. Studies in the History of Economics. F Palgrave Macmillan, London.
Elbadawi, I. A., J. B. Ndulu, and N. Ndung’u (1997). “Debt overhang and economic growth in Sub-Saharan Africa”. In Zubair Iqbal and Ravi Kanbur (Eds.), External finance for lowIncome Countries (49-76), IMF.
Fida B.A., Khan M.M. and Sohali M.K. (2012). Analysis of Exchange rate Fluctuations and External Debt; Empirical Evidence for Pakistan. African Journal of business management Vol 6(4), 1760-1768. Science and Education Publishing.
Greene J. (1989). The External Debt Problem of Sub-Saharan Africa. Staff Papers (International Monetary Fund), Vol. 36, No. 4 (Dec., 1989), pp. 836-874.Palgrave Macmillan Journals on behalf of the International Monetary Fund
Gokhale S.M & Ramana J.V. (2013) Causality between Exchange Rate and Foreign Exchange Reserves in the Indian Context Global Journal of Management and Business Research Volume XIII Issue VII Version I Online 2013 ISSN: 2249-4588 & Print ISSN: 0975-5853
Irungu E.N (2017). Factors that Influence Volatility in the Foreign Exchange Rate in Kenya. United States International University Africa. http://erepo.usiu.ac.ke/bitstream/handle/11732/3326
Kenya Government, June 2003. Economic Recovery Strategy for Wealth and Employment Creation 2003-2007. Ministry of Planning and National Development.
Kenya’s Public debt status 2009 An Overview of The Current Status, Insights And Public Awareness report. A report by the Kenya Debt Relief Network. (KENDREN) Http://Www.Kendren.Org/Fileadmin/Pdf_Reports/The_State_Of_Kenyas_Debt_Report_2008.Pdf
Kibiy J. & Nasieku T. (2016).Determinants of Exchange Rate Volatility of the Kenyan Shilling against World Major Currencies. International Journal of social sciences and information technology Vol.II, No. IX (Oct., 2016), 2412-0249.
Krugman.R.P & Obstfeld M. (2003). International Economics: theory and policy, 6th Pearson Education, Inc. Boston USA.
Ndikumana, L. & Boyce, J. K., (2003). Public debts and private assets: explaining capital flight from Sub-Saharan African countries. World Development, 31(1), 107-130. https://scholarworks.umass.edu/econ_workingpaper?
Njuguna, S.N. (2000). Monetary and Exchange Rate Policy in Kenya. African Economic Research Consortium; United Nations Public administration Networks http://unpan1.un.org/intradoc/groups/public/documents/IDEP/UNPAN003896.pdf
Nwanne,T.F.I and Eze O.R 2015. Assessing the effect of external debt servicing and receipts on exchange rate in Nigeria. International journal of economics and finance Vol.7 (9) 1916-9728.
Odera, Q. A. (2015). An Analysis on the Effect of External Public Debt on Exchange Rate Volatility in Kenya. http://erepository.uonbi.ac.ke/handle/11295/95259
Reinhart C.M. and Rogoff K. S., (2009). "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-72.
Saheed, Z. S., Sani, I. E., & Idakwoji, B. O. (2015). Impact of public external debt on exchange rate in Nigeria. International Finance and Banking, 2(1), 15-26.
Sene, B. (2004). The Impact of Debt Overhang on Equilibrium Real Exchange Rate in Developing Countries: A Theoretical Model. EURISCO Working Paper, No. 04-17. http://dx.doi.org/10.2139/ssrn.640481
Ugo, P. (2008) Domestic and external Public Debt in Developing Countries. (UNCTAD) Discussion Papers// United Nations Conference on Trade and Development (UNCTAD/OSFG/DP/2008/3).
DOI: http://dx.doi.org/10.61426/sjbcm.v6i2.1290
Refbacks
- There are currently no refbacks.
This work is licensed under a Creative Commons Attribution 3.0 License.
PAST ISSUES:
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.