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CHAPTER ONE INTRODUCTION 1.

1 Background Information
Public debt (also known as Government debt, national debt) is money (or credit) owed by any level of government; either central 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.

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 Republic of 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.

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. This distinction, 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.

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 18thcentury France. Ruined by the Seven Years War and aid to the rebels in the American Revolution, 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 bilateral agencies 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 04 Jun 05 EXTERNAL Bilateral Multilateral Commercial Banks Credit (As a % of GDP) Export 345,939 307,729 323,339 407,792 395,564 393,978 377,748 407,053 443,157 434,453 127,753 114,084 108,256 147,937 138,553 132,269 129,973 142,593 162,914 157,669 187,812 163,802 179,276 220,192 230,662 228,497 222,452 233,829 260,658 255,784 28,996 1,378 50.3 74.2 26,302 34,915 35,799 3,540 42.2 65.9 892 39.9 65.3 3,864 55.1 70.1 24,867 1,481 50.9 65.7 29,423 3,789 40.7 65.0 24,031 1,292 36.8 61.5 3,597 27,034 39.2 58.4 2,912 16,674 36.6 59.1 1,776 19,224 32.2 57.9

(As a % of total debt) 120,355 159,077 171,730 174,305 206,127 211,813 235,991 289,377 306,235 315,573 17.5 21.8 21.2 23.6 26.5 21.9 23.0 27.9 25.3 23.4 DOMESTIC (As a % of GDP) (As a % of total debt) 25.8 67.8 34.1 64.0 34.7 61.1 29.9 78.7 34.3 77.4 35.0 62.6 38.5 59.8 41.6 67.1 40.9 62.0 42.1 55.6

466,294 466,806 495,070 582,097 601,691 605,791 613,739 696,430 749,392 750,025

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 in June 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

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 AccountantGenerals Department at the MoF. In addition , debt management functions within MoF and CBK were guided by weak debt policy framework and adhoc debt management strategies. Under-staffing and high staff turnover was 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 Government approved the reco mmendations 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 The Government will contract new concessional foreign loan from multilateral

fundamentally sustainable over time.

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 a u thorized 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), on the 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 to GDP ratio given by the Maastricht Treaty of the European Union in collaboration with the Commonwealth 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. Secretariat and the Debt Relief

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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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CHAPTER FOUR SUMMARY, CONCLUSION AND RECOMMENDATION 4.1 Introduction


This chapter draws a summary of the findings deduced from research and analysis of the effect of public debt on economic growth and the public management strategies employed by the country to achieve debt sustenance. The conclusion and recommendations in this chapter is thus drawn from the stated findings of this study

4.2 Summary
As earlier noted the benefit of public debt in the country can be interpreted as the extent to which public debt promotes economic development. We have noted that high levels of debt can depress economic growth in low-income countries. As indicated by the debt-overhang hypothesis, however, debt has a deleterious effect on growth only after it reaches a threshold level. This threshold level is not easily measurable and may require further studies. It has also been noted that due to the challenges posed into a country by the public debt related liquidity constraints, the proportion of external debt in the total public debt stock needs to be carefully managed. The countrys public debt according to the Kenya Monthly Economic Review, November 2010, Kenyas public and publicly guaranteed debt on November 2010 stood at Kshs 1,309 billion, equivalent to 51.8 percent of GDP. This implies that the overall debt is still sustainable, given the 60.0 percent threshold for the total debt to GDP ratio given by the Maastricht Treaty of the European Union in collaboration with the Commonwealth Secretariat and the Debt Relief International. This study has analyzed the level of public debt from 1996 to 2010. It has been noted that public debt grew from Kshs 466 million in June 1996 to Kshs 1.225 billion in June 2010. In

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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 the resources 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 the Commonwealth 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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Dijkstra, Geske, and Niels Hermes, 2001, The Uncertainty of Debt Service Payments and Economic Growth of Highly Indebted Poor Countries: Is There a Case for Debt Relief? unpublished manuscript (Helsinki: United Nations University). Elbadawi, Ibrahim A., Benno J. Ndulu, and Njuguna Ndungu, 1997, Debt Overhang and Economic Growth in Sub-Saharan Africa, in Zubair Iqbal and Ravi Kanbur (eds.), External Finance for Low-Income Countries, pp. 49 76 (Washington: International Monetary Fund). Fosu, Augustin K., 1999, The External Debt Burden and Economic Growth in the 1980s: Evidence from Sub-Saharan Africa, Canadian Journal of Development Studies, Vol. XX, No. 2, pp. 307 18. Greene, Joshua, and Delano Villanueva, 1991, Private Investment in Developing Countries, in IMF Staff Papers, Vol. 38, No. 1 (March), pp. 33 58 (Washington: International Monetary Fund). Hansen, Henrik, 2001, The Impact of Aid and External Debt on Growth and Investment: Insights from Cross-Country Regression Analysis, paper presented at WIDER Conference on Debt Relief (Helsinki: United Nations University) (August). Savvides, Andreas, (1992), Investment Slowdown in Developing Countries during the 1980s: Debt Overhang or Foreign Capital Inflows, in Kyklos, Vol. 45, No. 3, pp. 363 78. Serven, Luis, (1997), Uncertainty, Instability, and Irreversible Investment: Theory, Evidence and Lessons for Africa, World Bank Policy Research Working Paper No. 1722 Nguyen, Toan Quoc; Bhattacharya, Rina; Clements, Benedict J. (2004). External Debt, Public Investment, and Growth in Low-Income Countries. Washington, DC, USA: International Monetary Fund, 2004. p 23. http://site.ebrary.com/lib/kmethke/Doc?id=10302967&ppg=24 . (Accessed: 24th March 2011)
Were, Maureen. (2001). The Impact of External Debt on Economic Growth in Kenya: An Empirical Assessment, UNU-WIDER Research Paper, DP2001/116. 20

Wheeler, Graeme; Jensen, Frederick , (2004). Sound Practice in Government Debt Management., Washington, DC, USA: World Bank Publications.

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