Does Foreign Exchange Rate Moderate the Relationship Between Foreign Capital Outflows and Economic Growth? A Panel Data Investigation of Kenya’s Economy (1986-2021)

Abstract

Purpose – This study aims to evaluate the nexus between foreign exchange rate, foreign capital outflow and economic growth in Kenya. This study focused on analyzing the moderating role of foreign exchange rate on the relationship between foreign capital outflow and economic growth in Kenya. The foreign exchange rate is an important measure in the economic development. Its fluctuations affect the levels of foreign capital outflow. The loss of foreign exchange reserve due to foreign capital outflow translates to great amount of savings lost in the country.
 Design/methodology/approach – This study employed a Panel Data approach and the World Bank’s residual model in the estimation of the magnitude of foreign capital outflow from Kenya during the period between 1986 to 2021.
 Findings – The panel data results revealed that the interaction variable MOD_FER had a coefficient of 0.05 and a significant probability value of 0.0001 which is significant at 5 percent level of significance. This means that foreign exchange rate moderated the relationship between foreign capital outflow and economic growth in Kenya during the period of this study. When the relationship with foreign capital outflow was moderated by 0.05 units then GDP grew by 1 unit. As such, foreign exchange rate is a significant factor in the relationship between foreign capital outflow and economic growth in Kenya.
 Originality/value – This study calculates the magnitude effect of foreign exchange rate in the relationship between foreign capital outflow and economic growth in Kenya for the first time. In addition, the study calculates the magnitude change of foreign capital outflow for MNE’s due to foreign exchange rate oscillations. This study suggests many policy proposals to deal with the challenge of foreign exchange rate, foreign capital outflow and economic growth in Kenya. The results of this study will benefit policy makers by providing them with data-based evidence that will guide them in making appropriate policies that discourage foreign capital outflow and institute proper management of foreign exchange rate to boost economic growth in Kenya.