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ABSTRACT:

Over the past decade, as Kenya has consistently made fiscal transfer from the central government to the counties, the country’s public debt has continuously become less sustainable. This observation 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 study sought to establish the relationship between fiscal transfers from the central government to the county governments and the technical efficiency of optimising sustainable public debt in Kenya. The study was anchored on the economic theory of technical efficiency. Using a co-relational quantitative research design, a time series analysis was made on secondary data collected over the period 2013 to 2021 from a census enquiry of all the 47 counties of the country. It employed the stochastic frontier analysis technique using the Evsey Domar debt sustainability assessment. Between 2013 and 2021, the technical efficiency of optimising sustainable public debt averaged 12.5% ranging between 87.5% and 0.05%. Over the period, fiscal transfers were found to improve the technical efficiency of optimising the sustainability of public debt (β = - 17.224); the relationship between the two variables was found to be statistically significant (p = 0.000 < 0.05). However over the study period, fiscal transfers had a downward trend. The study provides useful information for fiscal transfers policy and recommends that future research examine the relationship between the optimisation of sustainable public debt and the different forms of fiscal transfers.

KEYWORDS:

Fiscal, Decentralisation, Transfers, Optimum, Sustainable, Debt

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