Capital Flight and External Borrowing in Kenya: an Empirical Analysis (1980-2010)

Abstract

External borrowing is undertaken to acquire the additional resources needed for development purposes. This study uses the annual time series data to study the determinants of capital flight from Kenya for the period 1980-2010. The long-run relationship and short-run interactions among variables is examined using cointegration tests* In this regard, Ordinary Least Squares (OLS) technique of data analysis has been employed on secondary data and appropriate tests conducted with the aid of Eviews programme. The OLS results indicate that external borrowing in Kenya is still within sustainable levels and therefore does not impact on capital flight levels. The findings suggests that external debt accumulation is statistically insignificant in determining the amount of capital flight from Kenya and therefore the debt revolving door syndrome does not hold in the case of Kenya (Dooley, 1986). Changes in rates of inflation and terms of trade were found to stimulate capital flight from Kenya. Growth in the real gross domestic product is confirmed to reduce the rate of capital outflows. To stem capital flight from Kenya, there is need to maintain stable macroeconomic environment conducive for investments from both local and foreign investors. The existing debt management policies on external borrowing should be maintained to ensure external debt accumulation is at sustainable levels