A Critical Review of External Debt and Economic Growth in Kenya

A paper presented by Fredrick Mweni, USIU During the First Annual Management Research Conference at USIU - Africa in 2014The purpose of this paper is to review existing empirical studies on the relationship between external debt and economic growth, focusing on the effects of GDP growth rate, inflation, and official exchange rate. Some studies report a negative relationship between external debt and economic growth; others report positive effect on economic growth. The effect on inflation is heterogeneous across countries and cannot be generalized due to the differences in fiscal policy. In the same way, there are developing countries that show an insignificant effect of external debt on official exchange rate, while others reported loses in terms of foreign exchange. The difference in results is linked to the purpose for the borrowed funds. Owing to these mixed results, it is difficult to state whether external debt has a positive or negative effect on economic growth. It is also inaccurate to generalize the relationship between external debt and economic growth since findings vary from country to country due to the differences in macroeconomic environments. Interpretations of external debt-economic growth relationships should be limited to each country