Determinants Of Current Account Balance In Kenya

Abstract

Current account is one of the components in the Balance of Payment of a country. It covers all the transactions that involve the real sources (goods, services, income).It comprises the international balances of transactions in trade of goods and services, factor income and current transfers. Current account balance is significant because it is key economic indicator of country’s external performance. Despite this voluminous literature, there is hardly any consensus as regards the determinants of the current account balance in the world Kenya included to facilitate the policy decisions.The overall objective of this research study was to investigate the determinants of the current account balance in Kenya. The specific objectives were be:to identify the factors that determines the current account balance in Kenya, to determine the magnitude of effect of each determinant on current account balance and to identify the policy option toward the favourable current account balance in Kenya. The study covered the 1970 to 2010 period. Vector error correction model (VECM) was employed to determine the factors that affect the current account balances. Empirical model was established and various econometric tests were conducted to reveal the determinants and their strength. Results established that the 16.18% of the current account was caused by economic growth, 17.97% was explained by exchange rate, 19.54% was explained by current account itself, 14.74% by budget deficit, and 15.31% by inflation while13.88% by balance of trade in long run. On the other hand the impact of the, budget deficit and current account balance itself are positive while growth rate investment, balance of trade ,inflation, exchange rate on the current account are negative. Effects of investment and savings on current account exhibited both positive and negative but in small scale under period under review. From results, deliberate export oriented approach through product diversification and value addition to venture in international markets, prudent fiscal measures by the government and stable exchange rate and inflation are some of policy measures that can be employed by the government to stabilize current account.