Effect of external public debt on the exchange rate in Kenya

Kenya being a developing country has a budget whose revenue is widely composed of primary exports. However, primary exports are insufficient sources of revenue for they are of low value. In an attempt to supplement the inadequate revenue successive governments have obtained huge sums of external public debt to finance national development programmes. In 1980, the level of external debt was US$ 3386.81M. The debt had grown over the years to a record of US$ 16, 179.13M in 2014. The accumulated high external debt levels have serious implications to the official exchange rate. The study adopted a causal research design. The research targeted a population of data for 53 years covering the period 1963–2014. Ordinary Least Squares approach was used to analyze data retrieved from the World Bank and Kenya National Bureau of Statistics from 1980 to 2014. An Error Correction Model that flexibly combines the short run and long run dynamic models in a single system was adopted by the study. Inferential statistics were obtained by applying the PcGive Ox-metrics, Stata and E-views while prior tests on unit root, co integration, and granger causality were done before estimation. Findings of this study indicate that external public debt stock, debt service payment and foreign reserves have a positive and significant effect on exchange rate. The study recommends that the government adopts the debt relief strategies that will help reduce the external public debt level.