Moderating Role of Institutional Quality on Public Debt Sustainability in Kenya

Abstract

The focus of institutional economics is on the crucial part that institutions play in a nation’s economic performance. With a focus on transaction costs as a crucial element of economic activity, it offers a framework for understanding the interaction of governmental structures, corporate structure, and individual decisions. A mechanism for advancing transparency, accountability, and responsibility in policy decision-making is thought to be better institutional quality. Kenya is one of the Sub-Saharan African nations struggling to meet enormous debt repayment obligations that the World Bank and other bilateral financial institutions have said are unsustainable. Kenya has recently heavily relied on bilateral financial arrangements with the Chinese government to finance important infrastructural projects because it has not been producing enough output to effectively finance its development projects. Kenya’s economic growth and debt management problems are partly related to budgetary components where there has been an unnecessary exaggeration of government consumption components, and government institutions are to blame for such disparities in the budgetary components, which have been empirically confirmed to be growth retarding. The analysis shows that Institutional Quality has a significant positive impact on public debt sustainability, while Current Account Balance does not appear to have a statistically significant effect on it. However, the interaction between Current Account Balance and Institutional Quality has a statistically significant negative effect on public debt sustainability. Based on the findings, policymakers should prioritize improving institutional quality as it plays a vital role in enhancing public debt sustainability. This may involve measures to strengthen governance, transparency, and the rule of law, which could lead to better fiscal management and debt control. Enhancing institutional quality promotes economic growth, reduces government overreliance on foreign debts and thereby acts a moderator in making public debt to be sustainable.