ECONOMETRIC-ANALYSIS-OF-FISCAL-PERFORMANCE-IN-KENYA.pdf

Improving fiscal performance by reducing budget deficits has for long been at the heart of many governments in developing countries. Budget deficit in all cases whether monetized or not, tends to generate inflationary pressures triggering uncertain crisis in an economic system. Majority of the developing nations, Kenya inclusive have had a dismal performance by attracting negative budget balances over the years. To contain fiscal vulnerabilities, there is need to understand factors behind fiscal performance in Kenya. The objectives of this study are to establish the trends and extent to which these factors determine fiscal performance in Kenya. The study employed unrestricted Vector Autoregressive (VAR) model in estimating how macro-economic, political and institutional factors affect fiscal balance using longitudinal data collected, consolidated and analysed for the period 1963 to 2013. In the short run, both the first and the second lags of fiscal balance, Treasury bill, Tax revenue and inflation significantly influenced fiscal balance. On the other hand, only the first lags of real gross domestic product per capita growth rate, the first differences of the Total Debt service and the Gross Government Investment affected fiscal balance significantly whereas only the second lags of the first differences of both the current account and the ratio of broad money to GDP were found to significantly determine fiscal balance. The study suggests therefore that the government should intervene through refocusing on the existing fiscal policies to mitigate the anticipated future problems likely to be associated with the existence of unchecked behaviors of these determinants. Finally, the government and the relevant agencies need to consider adjusting Treasury bill rates downwards to increase fiscal balance. As well, the government should be able to encourage internal investment by the local and encourage internal borrowing at affordable interest rates. This may ultimately spur economic growth through varied sectors of the economy. The study emphasises on sound fiscal policy which is a critical determinant of long-term economic success and recommends Kenyan government to balance her financial affairs and avoid imposing a tax burden. Tax burden becomes a disincentive for people to work hard, save, invest, and be entrepreneurial, while still ensuring adequate and efficient public services.

Kenya's authorities, in articulating their vision for the next two decades of Kenya's development, understood clearly that fiscal policy would need to play a critical role in influencing the pace at which the economy will grow and its capacity to deal with the key challenges that will arise over the next several decades. Domestic policy challenges include a high population growth, rapid urbanization, significant weaknesses in infrastructural capacity, inadequate levels of investments, and pressures for decentralization. External challenges include security risks as well as an uncertain global economic growth environment. Fiscal policy will not only affect macroeconomic stability, but also whether Kenya can transition to a higher economic growth path, reduce its high poverty rate, and address its substantial income, asset, and regional inequalities. The paper by Thugge, Heller and Kiringai examines whether Kenya's medium-term fiscal policy strategy is responsive to addressing the potential scale of the challenges confronting Kenya, particularly given the inevitable uncertainties assicuated with the global economic environment. It also takes stock of the impact of recent developments on the viability of the original strategy.

2014

Several people contributed in numerous ways to the successful achievement of this feat. I wish to express my sincere thanks to God for his wisdom and good health that made it possible for me to complete this project successfully. My sincere appreciation also goes to my family and friends for their moral support and encouragement during the period of the research. I greatly acknowledge the efforts of my supervisors, Mr. Benedicto Ongeri and Dr. Seth Gor for the professional advice and tireless guidance in the research project. Your critiques gave the paper its present form. My special thanks also are extended to all lecturers and staff at the School of Economics for their sincere contribution and help. The contributions of those not mentioned are equally appreciated. I would also wish to extend my appreciation to fellow students at the school of Economics and all friends, with whom we shared, exchanged and discussed ideas. I acknowledge the authors whose pioneering studies were of much assistance to this research project. To all of you kindly accept my appreciation for your great support. May God bless you iv DEDICATION The research project paper is dedicated to my late father, David Njoroge Kimani, my mum, lovely wife and daughter Kelcy Wanjiru.

International Journal of Public Finance, 2020

The purpose of this paper is to examine the effect of fiscal policy stance on public expenditure in Kenya while underpinned by the theory of fiscal policy, Peacock-Wiseman hypothesis, and Wagner's Law of increasing state activities. The methodology used was time series modelling involving the following steps; firstly, employing descriptive statistic analysis. Secondly, diagnostic testing involving stationarity test, cointegration test, and Granger causality tests. Thirdly, time series modelling was done using VECM and VAR models. Finally, post-diagnostic tests involving serial correlation test and heteroscedasticity test. The research indicates a negative relationship between fiscal policy stance (a budget deficit) and public expenditure, but fiscal stance through tax has a positive relationship with public expenditure. Fiscal policy stance and public expenditure are cointegrated, as shown by the Johansen cointegration test. Still, there is no short run causality between them as indicated by the Wald test statistics. The study is limited to fiscal policy stance and public expenditure in Kenya while considering selected macroeconomic factors. The research findings are vital to policymakers. Fiscal policy stance indirectly affects public expenditure through economic growth and macroeconomic factors. This implies that fiscal policy stance does not substantially affect public expenditure as supported by the theory of fiscal policy that contends that policymakers could have a lower incentive to pursue public interests compared to their interests.

Greener Journal of Social Sciences, 2013

The Kenyan government has been committed to a stable macroeconomic environment, characterized by low and stable inflation and sound fiscal policy. However, in the late 1970s to date, the government has continued to experience high, persistent and unsustainable deficits. Despite the fact that economic reform programs adopted in recent years have emphasized demand management through fiscal restraint, fiscal deficit has been phenomenal to Kenya's economy coupled with a dwindling economic growth. The study therefore attempted to establish the extent to which fiscal deficits and economic growth are related and further investigated ways in which fiscal deficits (transmission mechanism) have effects on the growth and development of the Kenyan economy. The study used both exploratory and causal research designs and employed time series secondary data for a period of 38 years (1970-2007), purposively selected and was estimated using OLS method. The study also performed various econometric tests such as Dickey Fuller (DF) and Augmented Dickey Fuller (ADF) unit root test. Other diagnostic tests like multicollinearity were performed. The study found positive relationship between budget deficits and economic growth, in congruent with the Keynesians assertion and hence recommends prudent financial management and enhanced revenue collection by revenue authority so as not crowd-out private sector investment by borrowing domestically.

Fiscal policy in Kenya has been unstable. Fiscal balance to GDP ratio worsened from a surplus of 0.2 percent to a deficit of 7.6 percentwhile debt to GDP ratio rose from 25.4 to 56.2 percent between 1963 and 2015. This was against deficit target of 4.8 and debt ratio of 41.4 percent in 2015. The continued build up of debt implies debt stabilization is not a priority and high debt may lead to adverse effects to the economy. The paper estimated the optimal fiscal balance to GDP ratio needed to stabilize debt levels and establish how the government reacts to changes in debt levels using fiscal reaction function in order to establish if the government was concerned with debt stabilization. The government requires an average fiscal deficitratio of four percent between 2016 and 2030. Fiscal policy has not been responding adequately to changes in debt levels as the government pursued an expansionary fiscal policy. There is need for a fiscal law setting maximum fiscal deficit to GDP ratio a...

Journal of Economics, Management and Trade

This study aims at analyzing the effect of tax and debt-financed government expenditure on economic growth in Kenya using time series data from 1980-2014. Vector Error Correction Model (VECM) was used to analyze the data. The empirical findings showed that public investment expenditure financed by issuing debt has positive effect on economic growth. The results also indicated that financing government consumption expenditure using debt has negative effect on economic growth. With regards to tax revenue, the results indicated that tax financed public consumption spending affects economic growth negatively. Moreover, the results showed financing government investment expenditure using tax revenue promotes economic growth. Based on the findings, this study therefore recommends fiscal authorities in to use borrowing to finance investment expenditure as opposed financing consumption spending. Additionally, given the adverse effects of debt-accumulation on growth performance, policy maker...

JOURNAL OF ECONOMICS, FINANCE AND MANAGEMENT STUDIES

Macroeconomic stability has been a concern to many economies as it shows the economic health of a nation. Kenya has had unsustainable and persistent fiscal deficit which has been phenomenal in the recent past despite several economic reforms being established in an attempt to stabilizing the economy. The study was informed by the persistent increase in the budget deficit in Kenya amidst economic stagnation and macroeconomic instability. This therefore led to an attempt to establish the effect of selected macroeconomic variables on the budget deficit in Kenya. The specific objectives were to determine the effect of interest rates; exchange rate; inflation and money supply on budget deficit in Kenya. The study sought to evaluate the significant effect of the selected macroeconomic variables on budget deficit in order to formulate the policy consideration to the economic problem. The study was guided by the Keynesian which was the main theory of the study. The Mundell-Fleming and Ricar...

2019

The trend in external borrowing by Kenyan government has been increasing while economic growth has shown fluctuating trend. External debt rose from 2.04 billion in 1970 to 1.14 trillion in 2014 .Annual growth rate was 5.9% in the period 1978-1979 and dropped to 3.1% in the period 1979-2001 and later increased to 4.4% in the period 2002-2014.Following lack of consensus from empirical perspective, relationship between external budget deficit financing and economic growth is not clear. Subsequently, despite the role of external budget deficit financing to the government financing mechanisms, there are conflicting information about their effect on economic growth. The purpose of this study was to determine the effect of external budget deficit financing mechanisms on economic growth in Kenya. The study used secondary time series data for the period 1970-2014 from Economic Survey published by Kenya National Bureau Statistics. The study was guided by neoclassical growth theory and adopted...

Academic Journal of Economic Studies, 2019

Public debt and tax revenue are used in the financing of government expenditure programs with the ability of boosting social welfare. The contrast is that public debt is used to finance the budget deficit gap resulting from shortfall in tax revenue. This study sought to investigate the links between public debt, tax revenue and government expenditure over 1960 and 2011 using data obtained from economic surveys of the Kenya National Bureau of Statistics. A Vector error correction model, Cholesky forecast error variance decomposition, and dynamic forecasts are employed in the study. The results for the vector error correction model indicate that for the public debt and government expenditure equations, about 36 percent of deviations from the long run equilibrium is corrected in the next period compared to approximately eight per cent for the tax revenue equation. The short run model shows that the size of government expenditure has a debt increasing effect while the size of tax revenu...