Abstract:
Fiscal sustainability refers to a government's capacity to generate sufficient revenue to cover its expenses and repay its debts without accumulating excessive liabilities or creating new money. Recent observations indicate that Kenya's economic growth has slowed, prompting concerns about its fiscal sustainability. This study investigates the long-term relationship between Kenya's economic growth and certain budgetary sustainability indicators, specifically the public primary budget balance and external debt. Two control variables -trade balance and inflation -were also considered, with data sourced from the IMF and World Bank. Utilizing time series annual data spanning from 1990 to 2023, the study employed the autoregressive distributed lag (ARDL) bounds test and error correction model to analyze the data through three stages: unit root testing, F-bounds cointegration testing, and estimating the ARDL error correction model. The findings reveal a long-term relationship between fiscal sustainability indicators and economic growth in Kenya. Notably, the primary budget balance, which serves as a proxy for fiscal sustain-ability,aswellasinflationandtradebalance,werefoundtonegativelyandsignificantlyimpacteconomic growth in the country. Conversely, external debt, another proxy for fiscal sustainabil-ity, exhibited a positive effect on economic growth over the long term. To foster sustained eco-nomic growth in Kenya, government policymakers should prioritize controlling public spending, managing external debt levels, and enhancing revenue generation efforts.
