Analysis of Macroeconomic Determinants of Economic Growth in Kenya

Abstract

Kenya vision 2030, seeks to achieve an economic growth rate of 10%per annum beginning the year 2012 henceforth. However, although economic growth rate has been on an upward trend since 2010, this target has not yet been achieved. The Kenyan government through various policies and initiatives has tried to target some of these factors to trigger growth. Despite these efforts, the economy continues to be marked by periods of stagnating and low economic growth as measured by annual Gross Domestic Product and policy makers are constantly revising their recommendations with a view to propel growth. The purpose of this study was to conduct an analysis into the macroeconomic determinants of Economic growth in Kenya. Specifically, the study sought to analyze the effects of external debts, interest rates, foreign direct investments and exchange rates on Economic Growth in Kenya the study used causal research design to establish the relationship between Economic growth and the four macroeconomic variables. The population for the study was all data on Foreign Direct investments, Exchange rates, External Debts and Lending Interest rates from 1963 up to the 2014/2015 fiscal year. Purposive sampling was adopted to select the sample size of macroeconomic data for 30 years from 1985 to 2015. The study used the error correction model to carry out the analysis. This approach was systematic and involved testing of stationarity of the data using Augmented Dickey Fuller, determination of Cointegration vector using the Engle-granger two-step approach and finally the error correction term. Time series data for the study period of 30 years was analyzed using PcGive Ox metrics and Eviews software. T-statistic and F-statistic were used to test the significance of the coefficients and overall model respectively. The study established that foreign direct investments, external debts, lending interest rates and exchange rate had statistically significant effects on economic growth in Kenya with a P value of 0.000 for all the variables. External debts and foreign direct investments were found to have a positive relationship with economic growth while lending interest rates and exchange rate had an inverse relationship with economic growth.98.85 % variations in economic growth were explained by variations in the independent variable and the overall model fitted the data well as indicated by the P value of the F- statistic 0.1338<0.05 at 5% level of significance. Recommendations were thus made that policy makers should come up with incentives that attract foreign direct inflows into the country and take measures to curb increases in lending interest rates and the exchange rate. The findings of this study would aid policy makers to identify and implement policies compatible with economic growth.