Determinants of Sugar Demand in Kenya

Abstract

This study examines the factors affecting the aggregate demand for sugar in Kenya using time series data dating from 1981 to 2018. The specific objectives of this study are: firstly, analyze the factors influencing the demand for sugar in Kenya, secondly, estimate the income and price elasticity of demand for sugar in Kenya, and lastly draw policy implications from the findings of the study. The study used multiple linear regression analysis methodologies in which the Vector Error Correction Model (VECM) was employed. The VECM revealed that the aggregate demand for sugar in Kenya has a long-run positive relationship with the independent determinants aggregate demand for sugar in Kenya) variables at a 1 % level of significance. The R-squared for the model is 0.7515 and is significant at the 1% level of significance. The price of sugar and quantity of sugar produced locally also has a long negative relationship with the aggregate demand for sugar at a 1 % significance level. The findings demonstrate that the own-price elasticity of sugar is -0.031 and the income elasticity is 0.453, implying that sugar is both price and income inelastic. The inelasticity of the price of sugar and income is an indication that sugar is an essential commodity in Kenyan households and the economy in general. The study established an aggregate demand for sugar that outstrips the local production of sugar. The local supply of sugar is hindered by the use of outdated milling machines in factories and demotivated farmers who shift from sugar cane farming to other crops because they are untimely remunerated for cane delivered to the factories. The study proposes the implementation of appropriate policy measures that will rejuvenate the local production of sugar for the shortage caused by rising aggregate demand to be bridged consistently and reliably.