Effect of Public Wages On External Debt in Kenya

Abstract

Most developing Africa countries have a high need for capital projects that requires a lot of government spending and attention. However, it is unfortunate that in Kenya, borrowed cash intended for capital projects is diverted to recurrent requirements like payment of wages and salaries, and debt repayment, putting a damper on national investment in viable projects. This poses a significant threat to the economy's growth. The following goals served as a guideline for the study; to determine the influence of public wages on external borrowing debt in Kenya using both cointegration and error correction model. Causal research design was adopted to explain the influence of public wages, social expenditure and debt servicing on external borrowing in Kenya. The study period was from 1970 and 2019 from which a 50-year time series data was employed for analysis. The research relied on secondary data which was collected with the aid of a structured data collection checklist from Central Bank of Kenya, and Kenya National Bureau of Statistics, International Monetary Fund and World Bank websites. Data analysis was done with an aid of Stata, E-views and Ox- Metrics statistical software. Stationarity of variables was tested using PP unit root test where public wages was reported to be stationary at level form. The study employed use of Ordinary Least Square (OLS) technique, to empirically examine the influence of recurrent expenditure variable on external borrowing in Kenya. There was a significant negative association between public wages and external debt whereby a rise in public wage by 100% indicated decrease in external debt by 101.92%. The overall model was found to be significant since the F-statistic value generated in the analysis was 124.664 with a p-value of 0.000 < 0.05. Model was a good predictor of external borrowing, with an adjusted R2 of 0.946 for public wages explaining foreign debt. This research recommends the study recommends that SRC should free up resources using the austerity measures which include wage reductions for government employees. Secondly, the government through the ministry of treasury should raise tax base to increase revenues. Finally, the results of this study may be valuable to government stakeholders who are charged with the responsibility of ensuring economic development through public sector financing, also it is expected to provide important information to policymakers in order to maintain external debt at manageable levels.