PUBLIC FINANCE.doc

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CHAPTER ONE

INTRODUCTION

1.1 Background Information

Public debt (also known as Government debt, national debt) is money (orcredit) owed by any

level of government; eithercentral government, federal government, municipal government

or local government. As the government draws its income from much of the population,

government debt is an indirect debt of the taxpayers.

Public debt can be categorized as internal debt, owed to lenders within the country, and

external debt, owed to foreign lenders. Governments usually borrow by issuing securities,

government bonds and bills. A broader definition of public debt considers all government

liabilities, including future pension payments and payments for goods and services the

government has contracted but not yet paid. Another common division of government debt is

by duration until repayment is due. Short term debt is generally considered to be one year or

less, long term is more than ten years. Medium term debt falls between these two boundaries.

Why do Governments raise public debt?

1. Governments borrow to cover the deficits in their budgets.

2. Sometimes there are wars or natural calamities in which case Governments are forced

to incur much larger expenditure and hence running into debt.

3. Governments may also borrow to achieve set development and economic objectives

(Bhatia, 2006).

The Kenyan Government is no exception and this is why it has borrowed. The public debt has

grown over the years in the country for example Kenyas public debt increased from Kshs

466,294 million (or 67.8 percent of GDP) at the end of June 1996 to Kshs 1.225 billion in

June 2010 (Ministry of Finance Annual public debt management report, 2006).

This paper seeks to find out whether public debt in the country is related to GDP growth and

whether the debt management strategies in place are effective for public debt sustenance.

Studies done on the impact of external debt to economic development show an inverse

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relationship between external debt and economic growth. External debt stock to GDP is

inversely related to the level of private investment to GDP in developing economies (Shabbir,

2003).

If countries fail to utilize their debt productively, mobilize investment and create new

employment opportunities; they will eventually get stuck up with the dilemma of lower

revenue base which will affect their spending capacity, thereby leading to higher debt

servicing (Were, 2001). The slower economic growth in late 1980s and 1990s is attributed

to lack of proper utilization of external debt which led to higher debt servicing and even

withdrawal of lending by some multilateral lenders (Interim poverty reduction strategy paper

2000-2003, 2000).

The public debt management in the country was characterized by weak institutional

framework while the external debt database was incomplete and unreliable before 2003 (MoF

Annual public management report, 2006). Before the year 2003 there were no documented

operations manuals on business processes while the existing public debt registry had

incomplete debt records. Also lacking was strong policy framework and debt management

strategies during this period. Strong policy framework and debt management strategies ensure

that debt is sustainable and that it does create liquidity problems for the country or crowd out

investments.

This seminar paper proposes that though public debt does not necessarily increase economic

development, the proper utilization may minimize the debt overhang and liquidity constraint

hypothesis. Also it proposes that a sound policy framework and debt management strategy is

key to debt sustenance.

1.2 Objectives

The seminar general objective is to educate the public on the Kenyan public debt and

specifically seeks to achieve the following:

i. Evaluate whether the level of public debt drives the GDP

ii. Evaluate the effectiveness of debt management strategies in debt sustainability.

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This seminar will also point out to the Government, the National Assembly and Government

agencies on the need to employ strategic debt management policies.

1.3 Expected Outcomes

The target audience is expected to be informed of the level and the trend in public debt, its

composition and its direct effects on the economy. The Government and especially the

treasury is expected to critically evaluate the debt management policy towards a sustainable

debt for the country.

1.4 Target Audience

The target audience is the general public, the cabinet, the National Assembly of the Republicof Kenya, the Government of Kenya and the Ministry of Finance. The study will also target

students and lecturers interested in public finance.

1.5 Scope

This seminar will consider public debt in the last five years (2006-2010) and compare with

the public debt in the period 1996 to 2005. This comparison will be limited to the debt level,

debt composition, and debt as a percentage of GDP, debt management policy, and debt

service.

1.6 Method of Analysis

This seminar paper will employ an analysis of various secondary literature sources that

include public debt management reports from the Ministry of Finance, the monthly economic

review from Central Bank of Kenya, and the medium term plans for debt management from

Ministry of Finance and Ministry of Planning and Vision 2030. This presentation shall

endeavor to collate the seminar findings into a seminar paper covering literature review,

discussion and findings, summary, conclusions and recommendations.

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CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

The literature review will explore the history of public debt, the background of public debt in

Kenya and the framework of debt management in the country. The background of public debt

in Kenya will be limited to debt for the period 1996 to 2010.

2.2 Theoretical Literature Review

2.2.1 The history of public debt

The history of public debt is the very history of national power: how it has been won and how

it has been lost. The history of public debt is intimately tied to the evolution of the state itself.

In the ancient empiresBabylon, Egypt, Chinarulers must at least occasionally have found

it necessary to borrow on the expectation of future conquests, harvests, or taxes. But its in

Greece where the first known records of sovereign loans appeared in the 5th century B.C.

With insufficient taxes and war booty to finance their military campaigns in the

Peloponnesian War, the Greek city-states took to borrowing from the religious authorities,

who had been hoarding temple offerings from the faithful. The debt habit quickly spread

throughout the Greek city-states, and the hubris of debt played no small part in the erosion of

Hellenic power and the rise of Rome. Government borrowing continued, although during the

entire first millennium A.D. it remained the exclusive right of princes, motivatedand

reimbursedmainly by warfare.

Debt did not become truly public until national authority became something separate from

the person of the prince. Once sovereignty finally became embodied as a state, an abstract and

immortal entity, a nations debt could be carried over from one ruler to the next. Thisdistinction, between the signer and the entity he represents, first appeared in Europes only

stable organizations at the time: Christian religious orders. The first known institutional loan

was contracted by the English monastery of Evesham in 1205.

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The distinction proved useful and soon caught on in the Italian city-states. From the 13th to

the 15th century, the princes and ship owners who governed Venice, Florence, and Genoa

never stopped borrowing from merchants in order to finance their wars against one another

for commercial supremacy. It was the Italians who invented the public treasury. In 1262,

Reniero Zeno, Doge of Venice, explicitly allocated debt to the city, confiding its management

to a specialized bureaucracy called Il Monte. His innovation quickly found imitators in rival

Italian city-states and beyond.

With the rise of public treasuries came instruments for a more sophisticated management of

public debt. Moratoriums, inflation, and defaults became stages of the debt cycle, and this

inexorable pattern kept repeating itself, sometimes disrupted by revolutions, as in 18th-

century France. Ruined by the Seven Years War and aid to the rebels in the AmericanRevolution, the French kingdom was on the verge of bankruptcy. In 1787, public debt

reached 80 percent of GDP and debt servicing accounted for 42 percent of state revenue.

Across the Atlantic, meanwhile, the leaders of the newly independent United States of

America were struggling to manage the consequences of their own revolution. The rebels had

taken out loans to finance the War of Independence, and now the young federal state had to

decide how to deal with the public debt. The matter was settled on June 20, 1790, over dinner

in New York. Alexander Hamilton conceded the establishment of the national capital in a

neutral location; in exchange, Thomas Jefferson and James Madison agreed to roll the

individual states war debts into bonds to be underwritten by the new federal government.

The American and French revolutions opened a new phase in the history of debt. With power

now in the peoples hands, state spending grew to cover a wide range of public services:

transportation, communication, police, health care, education, even retirement. These new

needs drove more and more borrowing, resulting in the creation of ever-more-sophisticated

financial instruments. But trouble arose as the amount of borrowing spawned doubt about

governments capacity to repay, leading markets to demand ever-larger returns. Faced with

unsustainable debt, states often simply defaulted. Between 1800 and 2009, the world

experienced more than 300 national defaults, some on all debt, and others only on the debt

held by foreigners.

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2.2.2 Public debt in Kenya 1996-2006

Kenya joined the IMF in 1964, and The World Bank granted its first loan to Kenya in 1960.

In the late 1970's and early 1980's, Kenya was among the major aid recipients in Africa, due

to the prospects of high returns, and a history of debt repayment.

According to the MoF Annual Public Debt Management Report (March 2007), Kenyas

public debt increased from Kshs 466,294 million (or 67.8 percent of GDP) at the end of June

1996 to Kshs 789,076 million (50.5 percent of GDP) at the end of June 2006. In terms of debt

category, domestic debt rose from Kshs 120,355 million (17.5 percent of GDP) at the end of

June 1996 to Kshs 357,839 million (22.9 percent of GDP) at the end of June 2006 while

external debt rose from Kshs 345,939 million (50.3 percent of GDP) to Kshs 431,237 million

(27.6 percent of GDP) in the same period. Despite the rise in the stock of debt during the

period, the proportion of overall debt to GDP declined due to a faster growth in GDP

particularly over this period.

The share of domestic debt increased from 25.8 percent of total debt at the end of June 1996

to 45.3 percent at the end of June 2006. Over the same period the proportion of external debt

in total debt fell from 74.2 percent to 54.7 percent. The shift in the composition of debt during

the period is attributed to reduced access to external funding from multilateral and bilateralagencies and increased domestic borrowing to close the shortfall.

As at end of June 2006, the leading multilateral creditor was IDA (47.4 percent of total

external debt), followed by the African Development Bank Group (6 percent) the European

Investment Bank (3.1 percent) while Japan (18.4 percent) was the leading bilateral creditor.

The currency composition of the external debt was in Euros (34 percent), US dollars (32

percent), Japanese Yen (27 percent) and Sterling Pound (6 percent) while about 1 percent of

the debt was denominated in other currencies.

In May 2001, driven by the need to lower the rising cost of domestic debt borrowing, reduce

refinancing risk and promote the development of Government securities market, the

Government, in consultation with stakeholders through the Market Leaders Forum agreed to

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introduce longer dated Treasury Bonds to lengthen the maturity profile of the debt. This

initiative led to a dramatic change in the ratio of Treasury Bills to Treasury Bonds from 74:26

at the end of May 2001 to 30:70 at the end of June 2006. In addition, the Treasury Bonds

began to trade at the Nairobi Stock Exchange. In order to curb inflationary pressures resulting

from monetized borrowing through Government direct borrowing from CBK, the Central

Bank of Kenya Act (Cap 491 Laws of Kenya) was amended to limit the overdraft to 5 percent

of the latest Government audited revenue.

Overall public debt service declined during this period mainly as a result of rescheduling of

external debts through the Paris Club and London Club. Debt service decreased from Kshs

57,487 million (39.5 percent of revenue) in the fiscal year 1995/96 to Kshs 44,320 million

(14.1 percent of revenue) in the fiscal year 2005/06. However, it should be noted that in 2005

and 2006 external debt service to commercial creditors decreased significantly following the

Governments decision to suspend payments of external commercial debts pending the

outcome of a special audit and investigations by the Controller & Auditor General and Kenya

Anti-Corruption Commission respectively.

Over the period 2000/01 to 2004/05, domestic interest payments remained relatively stable.

The sharp increase in domestic interest payments in the fiscal year 2005/06 was attributed to

an increase in Government domestic borrowing to mitigate the effects of drought as well as to

compensate for the shortfalls in the budgeted external financing.

Kenya rescheduled its bi-lateral debts three times through the Paris Club, in 1994 (USD 540

million), 2000 (USD 288 million) and 2004 (USD 350 million). It also rescheduled its

commercial debts in 1998 (USD 43 million) and 2001 (USD 10 million) through the London

Club. Although Kenya does not qualify for debt relief under both the HIPC and Multilateral

Debt Relief Initiatives (MDRI), Government policy during this period was to seek for deeper

relief on bilateral basis by seeking debt-for development swap arrangements and debt

cancellation. However, according to the results of the Debt Sustainability Analysis (DSA)

carried out by the IMF in Public Debt Annual Report 2005/06 in November 2003, Kenyas

external debt burden indicators revealed that external debt was sustainable.

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Table 1 below shows an analysis of the composition of public debt in Kenya for the period

June 1996 to June 2005.

Table 1: Public Debt in Kshs Million (1996-2005)

Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun 0 4 Jun 0 5

EXTERNAL

Bilateral

Multilateral

Commercial

Banks Export

Credit

(As a % ofGDP)

(As a % oftotal debt)

DOMESTIC

(As a % of GDP)

(As a % of total

debt)

345,939

127,753

187,812

28,996

1,378

50.3

74.2

120,355

17.5

25.8

466,294

67.8

307,729

114,084

163,802

26,302

3,540

42.2

65.9

159,077

21.8

34.1

466,806

64.0

323,339

108,256

179,276

34,915

892

39.9

65.3

171,730

21.2

34.7

495,070

61.1

407,792

147,937

220,192

35,799

3,864

55.1

70.1

174,305

23.6

29.9

582,097

78.7

395,564

138,553

230,662

24,867

1,481

50.9

65.7

206,127

26.5

34.3

601,691

77.4

393,978

132,269

228,497

29,423

3,789

40.7

65.0

211,813

21.9

35.0

605,791

62.6

377,748

129,973

222,452

24,031

1,292

36.8

61.5

235,991

23.0

38.5

613,739

59.8

407,053

142,593

233,829

3,597

27,034

39.2

58.4

289,377

27.9

41.6

696,430

67.1

443,157

162,914

260,658

2,912

16,674

36.6

59.1

306,235

25.3

40.9

749,392

62.0

434,453

157,669

255,784

1,776

19,224

32.2

57.9

315,573

23.4

42.1

750,025

55.6

Source: Treasury and Central Bank of Kenya

2.2.3 Kenyas public debt 2006-2010

The Annual Report on Public Debt Management (May 2009) indicates that Kenyas public

and publicly guaranteed debt increased from Kshs 805,686 million or 43.8 percent of GDP inJune 2007 to Kshs 870,579 million in June 2008. During the period the proportion of total

debt to GDP dropped from 43.8 percent to 41.9 percent due to a faster growth in GDP. Gross

domestic debt rose from Kshs 404,690 to Kshs 430,612 million but as percentage of GDP,

domestic debt decreased from 22.1 percent to 20.8 percent during this period. Gross external

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debt rose from Kshs 400,966 million to Kshs 439,967 million but declined as a proportion of

GDP from 21.7 percent to 21.1 percent during this period.

The share of domestic debt declined from 50.5 percent to 49.5 percent while the proportion of

external debt in total debt increased from 49.5 percent to 50.5 percent during the period.

Thus, as at end June 2008, both domestic and external debt were almost equal with external

debt being only slightly more.

Kenyas overall debt service increased from Kshs 55,177 million as at end June 2007 to Kshs

63,957 million as at end June 2008. Interest payment on domestic debt increased from Kshs

36,860 million to Kshs 42,181 million while external debt service increased from Kshs

18,317 million to Kshs 21,776 million. The increase in domestic interest payment was

attributed to a higher domestic debt stock while the rise in external debt service was as a

result of the expiry of the Paris Club rescheduling Consolidation Period.

The public debt stood at Kshs 1.055 billion in June 2009 and Kshs 1.225 billion in June 2010.

In June 2010, the public debt was 48.1 percent of the GDP.

2.2.4 Public debt management

Over the years, public debt management in Kenya was characterized by weak

institutional arrangements with debt functions spread across departments at the MoF and

CBK. These include the DMD, External Resources Department (ERD), the Department

of Government Investments and Public Enterprises (DGIPE), and Accountant-

Generals Department at the MoF.

In addi ti on, deb t man age ment functions within MoF and CBK were guided by weak debt

policy framework and adhoc debtmanagement strategies. Under-staffing and high staff

turnoverwas evident particularly within DMD, undermining operational efficiency. The

external debt database was incomplete and unreliable. There were no documented

operations manuals on business processes while the existing public debt registry had

incomplete debt records.

In 2003, the Government requested the World Bank for technical assistance to carry out a

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study on existing public debt management practices and make recommendations on

appropriate reforms. A joint mission of the World Bank and IMF submitted to the

Government an Assessment Report on Central Government Debt Management and

Domestic Debt Market Development Program. The report recommended a road map for

the establishment of a Debt Management Office (DMO) at the MoF by December 2009

responsible for public debt management. In 2004, the Go ver nm en t approved the

recommendations of the IMF/WB Assessment Report and signed a credit agreement

with the World Bank to support establishment of a DMO and strengthen domestic debt

markets.

The following was the ad hoc debt management strategy of the Government in 2006:

Ensure that both the level and the rate of growth of Kenyas public debt are

fundamentally sustainableovertime.

The Government will contract new concessional foreign loan from multilateral

and bilateral sources. Such foreign borrowing must have a grant element of at least

35 percent and will be used to finance core poverty programs.

In projects that cannot be financed by these type of creditors, external

borrowing will be contracted from internationally credit rated commercial banks and

financial institutions The debt portfolio will continually be reviewed and restructured to minimize debt-

servicing costs.

Domestic borrowing and monetary policies will be closely coordinated so as to

ensure that the government raises required resources from the financial market without

destabilizing interest rates and consequently crowding out the private sector.

Efforts will be made to lengthen Treasury bond maturity to promote

development of the capital markets.

Ensure that the outstanding external debt stock is within the limit authorized by

Parliament.

Seek more debt relief on a bi-lateral basis to release resources to core poverty

programs in the Economic Recovery Strategy framework. Debt for development swaps

option will be encouraged.

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Prior to the introduction of comprehensive government debt management reforms in the late

1980s and the 1990s, government debt was frequently managed without clear objectives or

a supporting policy framework (Wheeler, 2004). Financing decisions were often politically

motivated or were based on achieving the lowest annual debt-servicing cost regardless of

portfolio risk. An integrated approach to debt management was rare. Management of

government debt was fractured, being split across a myriad of government agencies

(including the central bank), all of which vigorously protected their interests. These

difficulties were compounded by rapid debt accumulation by state-owned enterprises, large

debt portfolios at sub-national levels, and a wide range of contingent liabilities entered into by

the government.

2.3 Empirical Review

The empirical literature has found mixed empirical support for the debt overhang

hypothesis. Relatively few studies have econometrically assessed the direct effects of the debt

stock on investment. In middle-income countries, Warner (1992) concludes that the debt

crisis did not depress investment, while Greene and Villanueva (1991), Serven and Solimano

(1993), Elbadawi, Ndulu, and Ndungu (1997), Deshpande (1997) and Chowdhury (2001), onthe other hand, find evidence in support of the debt overhang hypothesis. Fosu (1999), in his

empirical study of thirty-five sub-Saharan African countries, also finds support for the debt

overhang hypothesis.

In contrast, Hansen (2001) finds that in a sample of 54 developing countries (including 14

HIPCs), the inclusion of three additional explanatory variables (the budget balance, inflation,

and openness) leads to rejection of any statistically significant negative effect of external debt

on growth. In a similar vein, Savvides (1992) finds that the ratio of debt to GDP has no

statistically significant effect on growth. Djikstra and Hermes (2001) reviewed a number of

studies on the debt overhang hypothesis and concluded that the empirical evidence is

inconclusive. Furthermore, few studies give a clear idea of the level of the debt-to-GDP ratio

at which debt overhang effects come into play.

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2.4 Literature Review Summary

In summary, the existing empirical literature provides limited evidence on how the stock of

external debt and debt service affect growth, particularly in low-income countries. In

particular, there is scope for additional work to clarify the size of these effects, especially for

low-income countries that are benefiting from debt relief. Furthermore, more work is needed

to explore the channels through which debt affects growth.

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CHAPTER THREE

DISCUSSIONS AND FINDINGS

3.1 Introduction

This chapter discusses the effect of public debt on economic growth. The chapter will explore

the nature of relationship between economic growth and public debt.

On the other hand, the chapter will look at the role and importance of public debt

management strategies in effectively managing public debts.

3.2 Public debt and economic growth

The benefit of public debt to any country can easily be translated to the relationship between

public debt and economic growth. As pointed out in the introduction of this paper, public debt

is sourced either to cover a budget deficit or support economic development unless it is aimed

at addressing the adverse effects of calamities. The implicit objective of public debt in this

argument is therefore to spur economic growth.

High levels of debt can depress economic growth in low-income countries. Debt appears to

affect growth via its effect on the efficiency of resource use, rather than through its depressing

effect on private investment. The foregoing is consistent with the debt-overhang hypothesis

which states that the current public debt stock will slow down economic growth. However,

debt has a deleterious effect on growth only after it reaches a certain threshold level. In Kenya

for example, during the period 1996 to 2006 the ratio of public debt decreased as a result of

higher GDP growth, while in the period 2007 to 2010 the public debt ratio to GDP increased

mainly due to slower growth in GDP.

In the case of HIPCs which benefit from debt relief the negative effects of public debt on

economic growth may be reversed. Indeed the positive effects of debt relief may already be

reflected in some of the healthier growth experienced by HIPCs in the past few years relative

to their poor performance of the 1990s (Nguyen 2004). External debt has indirect effects on

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growth through its effects on public investment. While the stock of public debt does not

appear to depress public investment, debt service does. The relationship is nonlinear, with the

crowding-out effect intensifying as the ratio of debt service to GDP rises.

The liquidity constraint hypothesis which states that an increase in external debt servicing

leaves less avenues for developing countries to service their debt, that, therefore, affect their

ability to borrow further from external resources, putting pressure on domestic borrowing and

leading to crowding out (Cohen 1993). This hypothesis is consistent with the literature

reviewed which explained that the Government of Kenya shifted its focus from external debts

to domestic borrowing in the period 1996 to 2006. This further put pressure on domestic

borrowing which was mainly composed of the 91 day treasury bills and few treasury bonds.

This increased the cost of domestic borrowing and the eventual crowding out effect. In 2001,

the Government introduced the long term treasury bonds to lengthen the maturity of the debt.

3.3 Public debt management

Public debt management strategies are essential in ensuring debt sustenance. Public debt

needs to be maintained at a level where it does not lead to debt overhang or pose liquidity

constraints as seen above. Also public debt should be at a level sustainable given the percent

threshold for the total debt toGDP ratio given by the Maastricht Treaty of the EuropeanUnion in collaboration with the Commonwealth Secretariat and the Debt Relief

International.

Sound governance practices are essential for government debt management because of the

size of government debt portfolios and the balance sheet risks that often accompany them.

Government debt portfolios and debt servicing costs can be very large in relation to GDP (or,

for debt-servicing costs, in relation to fiscal aggregates such as annual government tax

revenues or spending). Individual borrowing and hedging transactions undertaken by

government debt managers, particularly in foreign currency markets, can impose substantial

repayment burdens on future generations.

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Taxpayers therefore want to be certain that these portfolios are being managed soundly, given

the fiscal burdens and output adjustments that can accompany substantial portfolio losses or

sovereign default. In view of the size of the transactions being managed through various bank

accounts, and the scope for misappropriation that exists within systems environments,

assurances are needed that an effective system of checks and balances is in place and that the

control environment is being regularly reviewed and tested by independent auditors.

Investors need to be confident that government debt managers have legal authority to

represent the government and that the current government and future governments will stand

behind the obligations incurred by the debt managers. Aside from this, investors seek as much

certainty and transparency as possible regarding the framework that will guide future

government debt management decisions, particularly in relation to cost and risk tradeoffs,

borrowing plans, commitments to develop the liquidity of the government bond market, and

the regulatory environment (including the tax regime) as it applies to investors.

It is noted that in the country, the World Bank had a leading role in the establishment of a

sound debt management policy and strategy. This lead to formation of the Debt Management

Office (DMO) domiciled in the Ministry of Finance. In the pursuant of sound public debt

management strategy, the Central Bank of Kenya Act (Cap 491 Laws of Kenya) was

amended to limit the Government overdraft from Central Bank of Kenya to 5 percent of the

latest Government audited revenue. There was no limit on this overdraft before.

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terms of debt composition, domestic debt increased from 25.8 % in June 1996 to 53.9 % in

2010 whereas external debt decreased from 74.2% in 1996 to 46.1% in June 2010.

Though there was weak institutional framework on debt management and that debt

management functions spread departments at the MoF and CBK, there is now a well

documented debt management strategy, a better institutional framework and an established

Debt Management Office (DMO) domiciled in the Ministry of Finance. The established Debt

Management Office (DMO) came in to document operations manuals for the business

processes as well as build a complete public debt register.

4.2 Conclusions

It is evident that public debt promotes economic development and the level of public debt

needs to be regulated by sound debt management policy to avoid the effects of debt overhang

and liquidity constraint theories. Developing countries Kenya included will require external

financing to cover their budget deficits and boost economic growth. The composition of

public debt, the nature of financing and the ratio of the public debt to GDP are key factors to

consider as a country engages in public borrowing. Public debt in the country has been linked

to economic growth over a limited period with high external debt servicing reducing theresources for public investment.

The public debt management strategies reviewed over time and the policy framework ensures

insulation from political interference in the effective debt management. There is remarkable

improvement in public debt management over the period under review and the country can

expect to operate on a sustainable public debt.

4.3 Recommendation

Though the countrys debt is said to be sustainable according to the 60.0 percent threshold for

the total debt to GDP ratio, given by the Maastricht Treaty of the European Union in

collaboration with theCommonwealth Secretariat and the Debt Relief International; the

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country needs to establish its own threshold suitable and applicable to our own

macroeconomic factors.

4.4 Suggestion for further research

More studies should be conducted in the area of the relationship between domestic debt and

economic development especially in the country. Further studies should also be conducted to

establish the threshold at which public debt spurs economic growth especially in developing

countries.

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REFERENCES

Department of Debt Management, Ministry of finance. (March 2007). Annual Public Debt

Management Report July 2005-June 2006. Nairobi: Department of Debt Management,

Ministry of finance.

Department of Debt Management, Ministry of finance. (May 2009). Annual Public Debt

Management Report July 2007-June 2008. Nairobi: Department of Debt Management,

Ministry of finance. Pp 3-7

Bhatia H.G (2006). Public Finance. New Delhi:Vikas Publising.

Central Bank of Kenya. (November 2010) Kenya Monthly Economic Review. Nairobi:

Central Bank of Kenya Publications.

Chowdhury, Abdur R., 2001, Foreign Debt and Growth in Developing Countries, paper

presented at WIDER Conference on Debt Relief (Helsinki: United Nations University)

(August).

Cohen, Daniel, 1993, Low Investment and Large LDC Debt in the 1980s, American

Economic Review, Vol. 83, No. 3 (June), pp. 437 49.

Deshpande, Ashwini, 1997, The Debt Overhang and the Disincentive to Invest, Journal of

Development Economics, Vol. 52 (February), pp. 169 87 (Netherlands).

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Wheeler, Graeme; Jensen, Frederick , (2004). Sound Practice in Government Debt

Management., Washington, DC, USA: World Bank Publications.

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Documents

PUBLIC FINANCE.doc