Discussion Paper No. 162 of 2014 on Import Structure and Economic Growth in Kenya

Abstract

Imports are fundamental for the survival of a small open economy such as Kenya. Various trade reforms have been implemented to achieve several objectives including raising revenue, maintaining favourable balance of payment, and protecting import substituting industries. In this paper, import demand function for Kenya (1975 to 2011) is estimated to assess the major determinants of imports. An error correction model was adopted. The results show Kenya imports are significantly determined by real GDP, real exchange rate, foreign reserves and trade openness. In the short run, import demand is sensitive to real exchange rate, foreign reserves, and trade openness. The statistical significance of the lagged error correction term suggests imports and its determinants are co-integrated, hence have long run equilibrium. When a Granger causality test is estimated, the results show a unidirectional causality from real GDP to real imports. The paper, therefore, proposes enactment of policies that discourage importation for direct consumption.