The effect of selected macroeconomic variables on balance of payment in Kenya

Abstract

The balance of payments is a statistical statement that summarizes transactions between residents and non-residents during a period .While the selected macroeconomic variables are those that are pertinent to a whole economy either at the national or regional level and affect a large population rather than a few selected individuals. The objective of this study was to establish the effect of the selected macroeconomic variables on balance of payment in Kenya. This study made use of descriptive study design and used secondary data collected from Kenya National Bureau of Statistics and the Central Bank of Kenya. Monthly data was used in the computations. The study covered nine years starting 2006 to the year 2014, multiple linear regression used to model the relationship between the independent variables, and a dependent variable was used by fitting a linear equation to observed data. The Data analysis was done using Microsoft excel data analysis tool and the presentations made using tables and figures. The findings established that there was a direct relationship between BOP and exchange rates, BOP and interest rates, BOP and inflation rates and BOP and public borrowing. The study findings further established that 87.8 per cent of changes in BOP were contributed by the changes in the selected macroeconomic variables in Kenya with 12.2 per cent being contributed by other unknown factors not considered in the study. The regression results also indicate that the model used is very significant at 0.05 level of significance level with a p-value of 0.0000. The study recommends that the policy makers should take keen interest on how best to improve the value of Kenya’s export to the world; this will help bring to equilibrium the exchange rates that play an important role in determining the balance of payments. The government needs to increase marketing of its exports, create awareness among local entrepreneurs of existing export market that need to be exploited while giving incentives to local industries producing for export as well as those companies that assemble locally which will help curb demand for imports. The study further recommends that policy makers should come up with the best way to fund government project other than public borrowing that has on the rise and as observed from the study it is a major contributor to increase in BOP deficit.