Discussion Paper No. 91 of 2008 on Determinants of Kenya's Fiscal Performance

Abstract

This study sets out to investigate the determinants offi scal balance in Kenya. A model developed from three-gap analysis is used, together with time series data for the period 1975 to 2006. The long run results indicate that treasury bill rate positively and significantly affects fiscal balance, while total debt service and trade openness negatively and significantly affect fiscal balance. However, real per capita GDP is not a significant determinant of fiscal balance. Using error correction model, the results indicate that real per capita GDP positively and significantly affects fiscal balance, while total debt service and trade openness have a negative and significant impact. Finally, the 1993 liberalization policies negatively impacted onfiscal balance. The study recommends the need to develop policies that will spur economic growth and increase employment to increase revenue and curb fiscal deficit. Further, the government needs to use concessional sources of funds, such as gmnts instead of commercial borrowing, to reduce the build up of debt and.fiscal deficit. The government should also be cautious with policies geared towards trade openness as they expose the economy to adverse external shocks, thereby worsening fiscal balance.