Relationship Between Current Account Deficit And Economic Growth In Kenya

Abstract

Current account balance is a salient macroeconomic indicator of an economy’s performance. Current account deficits are majorly as a result of trade balance deficits caused by low export of commodities and services compared to importation. This study sought to establish the connection between the current account deficit and economic growth in Kenya. Specifically, this study sought to investigate the nexus between the merchandise trade deficit, services account surplus, primary income deficit, secondary income surplus and economic growth in Kenya. This study employed a descriptive research approach. Data on study variables was collected for the period between 1999 and 2021. From the International Monetary Fund database's, pertinent information was retrieved. Additional secondary information was gathered from the internet, the Central Bank data base and the Economic Surveys. The models employed included; the Johansen cointegration test, and the Vector Autoregressive model. The study applied the use of STATA statistical program. It was established that merchandise trade deficit has a negative and significant relationship with economic growth in Kenya. The study found that services account surplus has a negative and significant relationship with economic growth in Kenya. It was established that secondary income surplus has a negative and significant relationship with economic growth in Kenya. Primary income deficit had a negative, but non-significant relationship with economic growth in Kenya. The study concludes that current account deficit has negative but significant relationship with economic growth in Kenya. The study recommends that the government of Kenya should prioritize the promotion of exports of goods to reduce merchandise trade deficit. The study recommends that the government should reduce the reliance on services exports such as travel by promoting other sectors, such as manufacturing or agriculture. Lastly, the government should also promote export-oriented industries that can generate foreign exchange and reduce reliance on secondary income sources