The determinants of balance of payments performance in Kenya

Abstract

This study assessed the determinants of balance of payment performance in Kenya using time-series data for period the1975 – 2012. The study adopted unrestricted VAR model which had lag four as the maximum lag to estimate the relationship between balance of payments in Kenya and previous b alances in balance of payments account, money supply, exchange rate, real interest rate, terms of trade, openness of economy, gross capital formation and political inst ability . The VAR model showed that all variables and their l ags were highly significant in determining the balance of payment in Kenya. The st udy found a positive relationship between current balance of payment and previous bal ance of payment at first, second, and third lag, differenced money supply at fourth l ag, differenced exchange rate, terms of trade at second lag, differenced openness of economy at third and fourth lags, real interest rate at second and fourth lags and gr oss capital formation at fourth lag. On the other hand, negative relationship was found between current balance of payments and previous balance of payment at fourth lag, a differenced money supply at first, second and third lags, terms of trade at first and third lags, differenced openness of economy at first and second lags, real interest rate at first and third lags, gross capital formation at first, second and third lags and all lags of political instability. The study recommended that the Government of Kenya , Central Bank of Kenya, all financial institutions and other stakeholders whose activities influence money supply, terms of trade, openness of economy, real interest rate, gross capital formation, and political instability ought to apply relevant polic y measures for better management of Kenya’s balance of payment.