Effect of external public debt on unemployment in Kenya

Roselyne Mutoro Muturu; Edwin Simiyu; Consolata Ngala

doi:10.51867/scimundi.5.2.32

Authors

Roselyne Mutoro Muturu

Masinde Muliro University of Science and technology, Kenya https://orcid.org/0009-0008-5011-204X
Dr. Edwin Simiyu Masinde Muliro University of Science and technology, Kenya https://orcid.org/0000-0003-0655-4971
Dr. Consolata Ngala Masinde Muliro University of Science and technology, Kenya https://orcid.org/0000-0003-3629-4947

Keywords:

External Public Debt, Unemployment, Kenya

Abstract

Kenya continues to grapple with persistently high unemployment despite increased fiscal spending and public investments, primarily financed through external borrowing. Over the last three decades, external public debt has expanded significantly, yet its impact on labor market outcomes particularly unemployment remains questionable. This study investigates the effect of external public debt on unemployment in Kenya from 1994 to 2024. The study is grounded in key macroeconomic theories including the Keynesian theory of public expenditure, which advocates for increased government spending to stimulate employment; the Crowding-out theory, which warns of reduced private sector investment due to public borrowing and the Debt overhang theory, which suggests high external debt discourages private investment due to future tax burdens. Using a time series research design, secondary data were sourced from the Kenya National Bureau of Statistics, Central Bank of Kenya, World Bank, and Macro trends. Econometric analysis was conducted using EViews version 16, applying unit root testing, ARDL bounds testing, and long-run coefficient estimation. The Augmented Dickey-Fuller test confirmed stationarity of variables at first difference. The ARDL bounds test revealed the existence of a long-run relationship (F-statistic = 5.87 > upper bound critical value at 1% = 5.06). Long-run coefficient estimates showed that external public debt had a significant positive impact on unemployment (β = 0.2946, p < 0.05), indicating that a 1% increase in external debt raises unemployment by 0.29%. The findings offer critical insights for policymakers on the importance of prudent debt management policies aimed at reducing unemployment and fostering sustainable development.

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