Discussion Paper No. 148 of 2013 on Sustainability of Current Account Deficits in Kenya

Abstract

The Kenya Vision 2030 aims to transform Kenya into a globally competitive and prosperous nation with a high quality of life by the year 2030. Its competitiveness depends on, among others, the performance of its current account. Kenya’s current account is a persistent under-performer and has recorded a huge deficit to the tune of 18.7 per cent of GDP in the year 1998, and recorded a surplus only twice in the accounts lifetime. Its recent performance raises concern because, since the 2003 surplus, it has been on an unabated downward trend, which has brought it to a deficit greater than 10 per cent since 2011. Weighed against the international threshold of 5 per cent of GDP, Kenya’s deficit raises serious doubt on its sustainability. This study uses data between the years 1975 to 2011 and the intertemporal approach to the current account to test the sustainability of Kenya’s current account deficit. It tests the existence of a long run steady state by way of cointegration of the exports and imports, as constituted in the current account. The test fails to find cointegration between the two variables, leading to the conclusion that the current account deficit is unsustainable. This implies that there is a possibility of a reversal, which may develop to a crisis. It recommends urgent policy interventions to avert this possibility.