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Economic growth has always been at the centre of human civilization. Challenges of
economic growth dominate government policy and research agenda. Kenya Vision
2030 was the development blueprint in the country whose overall objective was to
achieve a middle-income nation status in order to be globally competitive, prosperous
and accord high quality of life to her citizens. Kenya’s Vision 2030 projected that
Gross Domestic Product growth should be 10% beginning 2012. However, this has
not been achieved. Available evidence indicated contrasting views on nexus between
selected macroeconomic variables and economic growth. The general objective of the
study was to determine nexus between selected macroeconomic variables and
economic growth in Kenya. Specific objectives were to determine effect of external
debt, domestic debt, inflation rate and foreign exchange rate on economic growth in
Kenya. The study was guided by Keynesian, Solow-Swan and Classical theories.
Explanatory research design was used and adopted positivism philosophy, which is
based on ontological principle and doctrine. A dataset comprising 40 annual
observations from 1980 to 2019 in Kenya was utilized for the analysis. A customized
Vector Error Correction (VECM) Model was applied to examine the long-term and
short-term impacts of macroeconomic variables on gross domestic product. The
results from VECM model indicated that R-square value was 58.62, Chi-square of
26.913 (p > Chi2 = 0.0494) showing that the model was fit for parameter estimation.
Coefficient of external debt was 0.0003 with a p-value of 0.001<0.05, which was
positive and statistically significant at 5% level of significance. Domestic debt
reported a coefficient of −0.266, with a p-value of 0.019<0.05, that was negative and
significant at 5% level of significance. The coefficient of inflation was
0.055, p value = 0.020 < 0.05 positive and significant at 5% level of significance.
Coefficient of exchange rate was −0.828 with a p-value of 0.001, which was negative
and significant at 5% level of significance. The study concluded that external debt had
a positive and significant effect which in essence could imply that external borrowing
was used as intended as laid down in the borrowing schedules. The study showed that
domestic debt expansion in Kenya had a negative and significant effect on economic
growth rate. This study recommended that Kenyan government should consider
minimizing domestic borrowing to avoid crowding out effect. Since increase in
inflation rate increased economic growth rate, the policymakers in CBK need to
obtain optimal level of inflation. Foreign exchange rate had a negative effect on
economic growth in Kenya, implying Kenya government should encourage
macroeconomic policies that strengthen stability of Kenya’s foreign exchange rate
against the major world trading currencies. |
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