Time Series Analysis of the Relationship between GDP Growth Rate and External Debt in Kenya

Abstract

The purpose of this paper is to examine the relationship between GDP growth rate and external debt over the period of 1964-2012. The study used time series data obtained from Government of Kenya published statistics, IMF International Financial Statistics, and World Bank reports. To ensure that the data does not violate the assumptions of classical linear regression model, Augmented Dickey-Fuller was used to test for stationarity. Other diagnostic tests were: multicollinearity, the lag length of each variable used in the analysis, unit root, heteroskedasticity, autoregressive conditional heteroskedasticity, auto correlation and normality tests. After conducting the tests, a macroeconomic debt growth model was estimated using ordinary least square to estimate the relationship between GDP growth rate and external debt. The study reveals a negative association between GDP growth and external debt, implying that an increase in GDP growth leads to a reduction in the level of external debt stocks. In terms of the regression analysis, it was established that there is no statistically significant relationship between GDP growth and external debt. The study recommends that the government should focus on policies that encourage economic growth as a way of becoming more self sufficient while ensuring that borrowed funds are utilized in productive investments to enhance the capacity of the country to meet debt repayment obligations.