Macro-economic determinants of Kenya's trade balance

Abstract

Balance of Trade is an important component of any economy’s growth and development. Since independence, Kenya has been struggling with balance of trade deficit in its current account. Given limited empirical evidence of the cause of such deficits, this paper undertook to investigate macro-economic determinants of trade balance. The paper applied Vector Error Correction Model on a 54-year period data (1963-2016). We find that terms of trade, trade liberalization and FDI have a significant and positive long-run relationship with trade balance. Similar results are observed for the case of Gross Domestic Product. Furthermore, we find a negative and a significant longrun relationship between real exchange rate and trade balance. The study recommended the need for the government to employ strategies that could stabilise exchange rate. It also recommended that Kenyan government should create conducive climate for investment, and stable macroeconomic factors to enhance trade balance.