Effects of uncertainty on domestic private investments in Kenya

Abstract

The domestic private investment serves as a prerequisite for the development and modernization of any economy. In Kenya, macroeconomic and political uncertainties play a significant role in influencing private domestic investments. That is informed by the fact that these investments allow investors to fund particular ventures, which creates jobs and increase government revenues through taxation, hence boosting the growth of the economy and improving the living standards of the people. However, private domestic investments are severely affected by both macroeconomic and political uncertainties in regards to how the government formulates political, economic, and regulatory policies that affect the business climate. Investors are risk-averse; hence they base investment decisions on prevailing and future conditions of the business environment. The research objective was to analyze effects of uncertainty on Kenya‘s domestic private investments. Domestic private investments served as dependent variables, while the independent variables were political rights index (political uncertainty proxy), world economic uncertainty index, real GDP, the real rate of interest, inflation, and real effective exchange rate served as proxies for economic uncertainty. To achieve that, the Autoregressive-Distributed Lag (ARDL) bounds technique was employed to establish a link between dependent and independent variables in the research. The model captures both short and long-run dynamics of this relationship amongst the variables. The research employed annual time series data from UNCTAD, World Bank, and the Central Bank of Kenya in a period spanning 1980 to the year 2019. The study results suggest that real GDP(RGDP) and real effective exchange rates (REER) have a significant and positive effect on private domestic investment (PDI).In contrast, inflation (INFL), Real interest rates(RINR), Political uncertainty(PRI), and WUIKEN (economic policy uncertainty and volatility in the stock markets) have a negative and significant effect on private domestic investments. Based on these results, the most significant factors affecting private domestic investments were found to be political uncertainty (PRI), real gross domestic investment (RGDP), and WUIKEN (economic policy uncertainty and volatility in the stock markets). Effectively, the study recommends that the government should enact policies that increase the ease of doing business and reduce economic and political uncertainty, such as a reduction in the tax rate, stabilization of exchange rate and political environment in order to reduce investor uncertainty and skepticism and also enhance their confidence. Keywords: Economic Uncertainty, Political Uncertainty, Private Domestic Investment