Impact of Macroeconomic variables on economic growth in Kenya

Abstract

Economic growth in any context is highly affected by a myriad of economic factors and one of the aims of the Kenya Government is to stimulate economic growth by vision 2030.This study investigates the impact of macroeconomic variables on Economic growth in Kenya and goes further to determine whether changes in macroeconomic variables can be used to predict the future economic growth in the country. Economic growth is a concept that refers to quantities changes in economic variables and is attributed to increased overall production. Economic growth is the increase of the capacities of a country’s economy to produce goods and services to a certain period of time compared to previous period. The GDP in Kenya advanced to 6.2 percent year- on-year in the second quarter of 2016 as compared to 5.9 % over the same period in 2015. This study focuses on Kenya where there has been poor economic performance from 1985-2002, recovery from 2003-07 and poor performance 2008-12 thus warranting attention of why there has been unstable economic growth in Kenya. The study is based on endogenous growth theory, neoclassical theory, New Keynesian framework theory and Accelerator theory of investment. Most studies have failed to consider the composite impact of the various macroeconomic variables on economic growth hence this study emphasizes on macroeconomic variables like remittances, gross capital formation, government consumption, inflation, and private capital flows on a time-seriated data while looking specifically at Kenya as the exclusive study area. The study followed an explanatory research design and the study period spanned from 1983-2017. Data was obtained from Central Bank of Kenya, Kenya National Bureau of Statistics, World Bank, African Development Indicators and relevant internet sources. Data analyses was done using statistical package for social sciences version 22 and findings summarized in graphs and tables. Regression analysis was conducted in order to establish inferential statistics; R, R-Square, P Value and F statistic to determine the significance of the model. From the findings there is a high significance impact of macroeconomic variables to economic growth since R-Square was 0.84 and because their corresponding coefficients are positive. These results are supported by both P value and F test statistic. P values are positive except for inflation which is -0.05 while F Value is 48.598 which is greater than the F statistic. Based on these findings, the study recommends monitoring of the macroeconomic environment since changes in the macroeconomic variables have an impact on the economic growth. The government should also work towards an environment that attracts gross capital formation and proper government spending to spur economic growth by providing a favorable business opportunity to investors. Proper utilization of capital flows should also be enforced by coming up with strategies to curb corruption which is rampant in the country.