Fiscal decentralization and technically efficient sustainable public debt in Kenya

Abstract

Kenya’s public debt sustainability has continuously worsened over recent years yet the country’s debt is still classified as sustainable. At the same time, the process of fiscal decentralisation has intensified in the country since its official initiation in 2013. That worsening public debt sustainability position contrasts with the position held in devolution literature that fiscal decentralisation makes the management of public funds more efficient, manifested by improvements in public debt sustainability. This contrast presented a knowledge gap, which this research sought to fill in. The study made a move away from measuring public debt sustainability, traditionally used to evaluate a country’s debt-carrying capacity and to justify or denounce increases in government borrowing. It moved towards making such evaluation by use of the technical efficiency of sustainable public debt. Its main objective was to establish the effect of fiscal decentralisation on the technical efficiency of sustainable public debt in Kenya. The specific objectives of the study were to determine the effect of revenue decentralisation on the technical efficiency of sustainable public debt; to determine the effect of the expenditure decentralisation on the technical efficiency of sustainable public debt and to determine the effect of fiscal-transfers decentralisation on the technical efficiency of sustainable public debt. The study was thus anchored on the economic theory of technical efficiency. Using a causal research design, a panel data analysis was made on secondary data collected over the period 2013 to 2021, using document and records based research tools from a census enquiry of all the 47 counties of the country. It employed the stochastic frontier analysis technique on the debt-sustainability assessment model developed by Evsey Domar. The findings of the research were: that between 2013 to 2021, public debt sustainability worsened from 39.8 percent to 69 percent; the technical efficiency of sustainable public debt averaged 12.5 percent ranging between 87.5 percent and 0.05percent. Over the period, revenue decentralisation (β = 0.143, p = 0.439) and expenditure decentralisation (β = 0.122, p = 0.000) were found not to improve the technical efficiency of the sustainability of public debt. Conversely fiscal transfer decentralisation was found to raise the technical efficiency (β = - 17.224) and was statistically significant (p = 0.000). It was concluded that while expenditure decentralisation worsened the technical efficiency of achieving an optimal sustainable public debt level, fiscal transfers decentralisation improved it and overall, the technical efficiency was very low. Additionally, the observed downward trend in fiscal transfers over this period exacerbated the poor technical efficiency of the sustainability of public debt. The study provides useful information for fiscal decentralisation policy and recommends that future research examine the relationship between the technical efficiency of sustainable public debt and the different forms of fiscal transfers used in the country