dc.description.abstract | This study investigates the determinants of current account balance
(CAB) in Kenya using intertemporal approach. By use of time series
analytical framework, an error correction model is estimated in order
to examine both long and short term relationships. The analysis is
based on a structural approach that highlights the role offu ndamental
determinants of saving and investment. The study results indicate that
Kenya's current account balance is positively influenced by terms of
trade, real exchange rate, economic growth and fiscal balance, with
terms of trade being the most significant positive determinant. On
the other hand, money supply, dependency ratio and foreign direct
investment negatively affect CAB in Kenya, whereby money supply is
the most significant negative determinant followed by dependency ratio.
Cointegration analysis has confirmed existence of a significant long-run
relationship in the foreign exchange market. However, current account
balance is not part of the cointegrating equation. Therefore,for Kenya
to progress towards a favourable current account balance aiming at
reducing persistent current account deficits and attaining sustainable
levels, the country should strive towards terms of trade improvement.
This can be achieved through enhancing export competitiveness by
means of diversification, quality improvement and technological
upgrading in value addition industries. Export competitiveness efforts
should be supported by policy measures that promote productivity
growth. Whenever the Kenya Shilling is overvalued, the Government
should resort to sterilized intervention in the foreign exchange
market. | en |