Macro-Economic Determinants of Kenya’s Trade Balance

International Journal of Research and Innovation in Social Science (IJRISS) | Volume II, Issue X, October 2018 | ISSN 2454–6186

Macro-Economic Determinants of Kenya’s Trade Balance

Joseph Mutana, Chepng’eno Winrose, Ernest Saina

School of Economics, Moi University, Eldoret Kenya

Abstract: – Balance of Trade is an important component of any economy’s growth and development. Since independence, Kenya has been struggling with balance of trade deficit in its current account. Given limited empirical evidence of the cause of such deficits, this paper undertook to investigate macro-economic determinants of trade balance. The paper applied Vector Error Correction Model on a 54-year period data (1963-2016). We find that terms of trade, trade liberalization and FDI have a significant and positive long-run relationship with trade balance. Similar results are observed for the case of Gross Domestic Product. Furthermore, we find a negative and a significant long-run relationship between real exchange rate and trade balance. The study recommended the need for the government to employ strategies that could stabilise exchange rate. It also recommended that Kenyan government should create conducive climate for investment, and stable macroeconomic factors to enhance trade balance.

Key Words: Trade balance, Current Account, VECM, Macroeconomics, Kenya.

I. INTRODUCTION

Over the years, Trade balance in most Sub-Saharan African countries has performed poorly (Ongutu, 2014). Chronic trade deficits have characterised majority of these economies and Kenya is not an exception. This is partially attributed to dependence on specific primary agricultural products as their only exports while importing many manufactured goods which results into huge trade deficits (UNCTAD, 2015). Countries have adopted various strategies to spearhead economic reforms ranging from fiscal to monitory policies as well as policies to enhance export and discourage importation of unnecessary goods and services. Value addition on agricultural produce has also been emphasized in the majority of developing countries. Balance of trade is a key component of the current account balances and therefore, knowledge of the determinants of trade balance is vital for policy makers in their efforts to enhance trading activities and hence national economic growth (Marchetti et al., 2012; McCombie and Thirlwall, 2016). Generally, an economy will experience two kinds of trade balance, that is, surplus which occurs when the value of a country’s exports surpasses that of exports and trade deficit for the case of low value of exports relative to import value (Posner, 1961).

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