Effect of debt-to-GDP ratio on economic stability in Kenya

Abstract

Kenya’s rising debt-to-Gross Domestic Product ratio poses a significant threat to its economic stability. Since surpassing the International Monetary Fund’s 50% sustainability threshold in 2015, the ratio has continued to climb, reaching 70% by mid-2024. This trend, driven by growing borrowing costs, external shocks, and constrained fiscal space, has weakened investor confidence and increased refinancing risks. This study therefore sought to examine the effect of debt-to-Gross Domestic Product ratio on economic stability in Kenya.  The study was anchored on sustainable debt theory. The study adopted a causal research design. Secondary time-series data was used in the present study and was collected by use of a data collection checklist. Data on debt-to-Gross Domestic Product ratio and economic stability was obtained from the Central Bank of Kenya, Kenya National Bureau of Statistics (KNBS) and The World Bank. Analysis of the quantitative data was based on descriptive and inferential statistics. Descriptive statistics focused on computation of mean, percentage, standard deviation and frequencies. Inferential statistics included correlation analysis and multivariate regression analysis. Diagnostic tests were performed to test for the regression model assumptions before carrying out regression analysis. The regression analysis indicates that the model explains approximately 72.40% of the variation in Kenya's economic stability, with an F-statistic of 11.7121 (p=0.0408), confirming its overall significance. The results reveal a significant negative relationship between debt-to-Gross Domestic Product ratio and economic stability, with a coefficient of -1.64891 (p=0.014), suggesting that a one-unit increase in debt-to-Gross Domestic Product ratio reduces economic stability by about 1.65 units. These findings support the hypothesis that higher debt levels adversely affect economic stability in Kenya. Therefore, the study recommends strengthening fiscal management, enhancing domestic revenue collection, maintaining a sustainable debt threshold, and prioritizing investments in high-return sectors such as infrastructure, healthcare, education, agriculture, and manufacturing.