Effect Of External Financial Inflows On Economic Growth In Kenya

Abstract

The purpose of this study was to investigate whether external financial inflows had a positive or a negative effect on economic growth in Kenya. The problem that prompted this study was the realization that previous studies were based on cross country research and as such do not factor in the country specific effects of the components to economic growth. This study therefore looked at Kenya as a specific country and tried to incorporate both private capital inflows and philanthropy and other official flows. The main objective of the study was to examine the effects of external financial inflows on economic growth in Kenya. The specific objectives were; establish the effect of Foreign Direct Investment inflows on economic Growth of Kenya; analyze the effect of Government borrowing from multilaterals on economic growth of Kenya; determine the effect of Foreign Aid inflows on economic growth of Kenya and determine the effect of migrant remittances on economic growth of Kenya. To achieve the objectives an ARDL model was used, preliminary unit root test, co-integration tests. The study sampled a period of 54 years starting from year 1963 to year 2017. Secondary data for analysis was collected from Central Bank of Kenya; Kenya National Bureau of statistics and the World Bank. The findings of this study were expected to form a basis for policy formulation for both policy makers and stakeholders in relation to FDI, Foreign remittances, foreign aid and government borrowing from multilaterals with a view of improving the economic growth to double digits and ultimate realization of vision 2030. The study found that FDI, MR, FA, GB explained significant proportion (89.32%) of the variation in GDP. Further, an increase in the FDI increases the GDP same to MR. Increase in FA decreases the GDP similar to GB. The study concluded that the country should make use of non-tax instruments such as specification on local content of inputs to enhance its benefits from FDI. Second, remittances could cause negative effects by recipient households spending more on luxury goods and leaving little for unproductive savings and investment. In addition, foreign aid can be enhanced positively to affect economic growth through various components such as loans, multilateral and bilateral aid flows, grants and technical cooperation. Further, high levels of debt depress economic growth as external debt slows growth after reaching a threshold level. It is recommended that technology transfer to firms need to be taken into consideration by the government to ensure that there are spillovers to the domestic firms and therefore GDP of the country can be increased in the process. There is also need for human capital accumulation which can reduce or mitigate poverty by increasing income and living standards. In addition, the foreign aids can be more efficiently used to improve their effect on GDP. Finally, the study therefore recommends that more investment by the government is needed to reduce external borrowing.