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Primary balance dynamics and public debt sustainability in Kenya

William Ng'ang'a, Julien Chevallier and Simon Ndiritu
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William Ng'ang'a: Strathmore University [Nairobi], UP8 - Université Paris 8 Vincennes-Saint-Denis
Simon Ndiritu: Strathmore University [Nairobi]

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Abstract: This study investigates the extent to which primary balance reacts to exacerbate or mitigate the effects of macroeconomic shocks on total public debt in Kenya. Based on time series data from 1981 to 2015, Structural Vector Autoregressive model (SVAR)is used to evaluate the interrelationship between primary balance, real exchange rate, interest payment, and Gross Domestic Product. The main objective was to evaluate the interactive nature of primary balance and automatic stabilizers and its implication on debt sustainability. The findings are threefold: (i) The results confirm that primary balance reaction to shocks is consistent with maintaining a non-explosive debt position. (ii) Fiscal consolidation appears counterproductive as a response to debt management, as this may dampen growth and ultimately compromise overall macroeconomic stability, especially in the long run. (iii) The findings also establish that debt uptake is positively associated with long-run GDP growth suggesting that public debt plays a vital role in macroeconomic development in Kenya.

Keywords: Primary balance; Debt sustainability; SVAR; Public debt dynamics; Automatic stabilizers (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2019-05-06
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