Is the Link between Public Debt and Private Investment Asymmetric in Kenya?
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Date
2026
Authors
Roseline Nyakerario Misati
Anne Wangari Kamau
Maureen Teresa Odongo
Kethi Ngoka
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
This study examined the relationship between public debt and private investment in Kenya, with a focus on the asymmetric effects of public debt. The study used both descriptive and empirical analysis, which was conducted using non-linear autoregressive distributed lag models and annual data covering the period 1967-2022. Three conclusions can be drawn from the descriptive analysis. First, debt spikes and troughs are explainable by a diversity of factors, including policy shifts and support to state-owned enterprises, with fiscal consolidation having a minimal role. Second, foreign-financed targeted and short-term projects, particularly towards the rural areas and low-income groups, have had a high success rate. Third, among comparator countries, Kenya ranks low in public investment efficiency scores, particularly in project selection and appraisal. The empirical results show evidence of asymmetric response of private investment to public debt with heterogeneity across various components of public debt. Specifically, the results show that rising public debt, external debt, and debt servicing are detrimental to private investment in the long run. The results also showed that the impact of an increase in debt on private investment is higher than the impact of a debt reduction, suggesting that an increase in debt may not be reversed by a similar reduction in debt. The results further show that declining domestic debt significantly decreases private investment, contradicting the crowding-out theory. The study makes five recommendations. First, the use of external debt should be strategic and targeted at sectors that bolster the private sector while minimizing reliance on commercial loans. Second, there is a need for further analysis to identify and focus policy on sectors that benefit from the complementary effects of domestic debt on private investment. Third, policy interventions on public debt should be heterogeneous across different components of debt. Fourth, efficiency gains from public investment would be enhanced by focusing policy priority on project selection and appraisal. Fifth, policymakers concerned with public debt management need to take into account the possible inability to reverse public debt increases with similar amounts of decreases.