The impact of foreign capital inflows on the Kenyan economy

Abstract

The main objective of this research paper was to attempt to analyse the impact of foreign capital inflows on the Kenyan economy. We also addressed ourselves to the problem of data availability and other limitations . .which would be faced in undertaking such an exercise. We found that there are potential sources from which we can obtain all the data required. However, the data currently available from these sources were not suitable for balance of payments analysis except those from the Central Bureau of Statistics (CBS). The CBS data, though weak in certain respects, could nevertheless be used for analysis but their limitations have to be borne in mind. Using the CBS data (the best available) we examined the effects of foreign capital inflows on investment, foreign trade and hence balance of payments, money supply and economic growth in Kenya. The results showed that although foreign capital inflows have some stimulatory effects on domestic investment, their effects on economic growth are small. Without taking into account outflows consequent on investment income and illicit transfers, private capital inflows had a positive effect on the balance of payments. This effect however could be negative if we consider these other outflows. Public capital inflows had a negative effect on the balance of payments. The effect of both types of capital inflows on money supply W8S to increase it but this did not greatly contribute to inflation. These results tended to support other partial studies done in Kenya and also some of the studies done in other countries. However, despite the statistical significance bf capital inflows as explanatory variables, the data shortcomings forestall us from making precise policy prescriptions.