Dynamics of Current Account Deficit: A Kenyan Experience

Abstract

Large and persistent current account deficits are among the most serious problems of many developing countries. The Current Account in Kenya has continuously been in deficit in the last three decades prompting the country to rely increasingly on risky short-term flows to balance the accounts. This has consistently created a financing gap. The purpose of this study was to provide empirically characterization of the dynamics of current account deficit and other macroeconomic variables. Based on the absorption approach, the study established the persistence and determinants of the current account deficit; Explanatory research design was adopted. Due to the time series nature of the study, Multivariate Vector Autoregressive, Granger causality test together with Variance decomposition and impulse response functions were used to empirically establish the determinants and dynamics of the current account deficit. The results indicate that current account deficit, gross domestic product growth, inflation and foreign direct investment are I(0). Degree of openness, terms of trade, external debt stock, foreign exchange, gross domestic savings, fiscal deficit, exports and imports are . The major determinants of the current balance are the degree of openness, terms of trade, oil price on the international market and inflation. The variance in the current account is better explained by its own shocks followed by shocks from degree of openness, fiscal deficit, terms of trade, external debt of stock, foreign direct investment, growth rate of gross domestic product, and inflation. From the findings, the study recommends the Country to focus on current account targeting policies together with policies that focus on increasing and stabilizing gross domestic product in order to increase exports and its competitiveness and focus on policies that reduce the burden of depending on oil from the world market.