Abstract
Agriculture is very important to any society’s future. In most developing and developed countries, it is the major backbone of the economy and its production over the last three to four decades has increased significantly. In 2018, the agricultural sector boosted the Gross Domestic Product globally by 4% and in 2020, its average contribution was 35 percent to the Gross Domestic Production (GDP) and 65 percent to foreign exchange earnings in Kenya. Agriculture provides the main source of livelihood, leading in generating of income and employment for more than 80 per cent of the Kenyan population and for the most citizens in developing countries. It’s also a major source of vital raw materials for national and international industry. However, its performance has been declining over the years despite the increased Foreign Direct investment directed to agriculture. Similarly, there is dearth of information with regard to how inflation and external debt has affected the sector. The study’s general objective was majorly to investigate the effect of macroeconomic factors on the performance of agricultural sector in Kenya. Consequently, the study specifically sought to: determine the effect of inflation on the performance of agricultural sector in Kenya, to assess the effect of foreign direct investment on the performance of agricultural sector in Kenya, to investigate the effect of external debt on performance of agricultural sector in Kenya and to evaluate the moderating effect of population growth on the linkage between macroeconomic factors and performance of agricultural sector in Kenya. This study was guided by the Harrod Domar growth model, the neoclassical model and the classical theory. This study adopted correlational research design. The data used was time series obtained from databases of the World Development Indicators, UNCTAD, World Bank Website, KNBS and Statista. Data was analyzed using EViews software. At level, the Augmented Dickey Fuller showed the presence of unit root but at first difference, the time series data was stationary. The Variance inflation factor (VIF) test values were less 10 showing no multi-collinearity. The study employed Descriptive and inferential statistics. Jarque-Bera test revealed a normal distribution of the series at 5 percent level of significance where the p-values > 0.05. For cointegration, Johansen test revealed presence of three cointegration equations. The LM test for Autocorrelation revealed absence of serial correlation with p-values > 0.05. The centered VIF values were lower than 10 hence showing absence of Multicollinearity. Glejser Test had probability of the F-statistics > 0.05 showing that there is no problem of Heteroscedasticity. The study also revealed that Foreign Direct investment has a positive and significant relationship on Performance of Agricultural sector with a coefficient of 0.1324 and P-value value of 0.00826 < 0.05 and External Debt has a positive and significant relationship on Performance of Agricultural sector with a coefficient of 0.5309 and a P-value of 0.00891 < 0.05 whereas Inflation negatively affect the performance of the agricultural sector with a coefficient of -0.2546 and a P-value of 0.00775 < 0.05. Population growth had a significant effect on the relationship between Macroeconomic factors and Performance of Agricultural sector shown by a change in R-squared from 0.935191 to 0.940763 with a Prob (F-statistics) of 0.0000. Therefore, from the Study, the Government of Kenya needs to attract more Foreign Direct Investment directed to the agricultural sector and also invest more External Debt in Agriculture to spur Agricultural sector Growth. Consequently, there is great need to reduce the inflation levels since it negatively affects the Agricultural sector performance.