Do Earnings From Food Exports Improve Kenya’s Current Account Balance?

Abstract

This study focused on the influence food export earnings have on current account balance in Kenya. It encompassed five independent variables namely; food export earnings, balance on services, foreign exchange rate, current transfers and income per capita with its main objective being to determine whether food export earnings can improve Kenya’s current account balance. The study applied time series analysis using Ordinary Least Squares method. The findings from the analysis revealed balance on services, food export earnings and foreign exchange rate exhibit long run association characteristics through unit root and cointegration test. It was further established from the analysis that there was a negative coefficient in Vector Error Correction Model which revealed long run causality running from individual lagged variables of balance on services, food export earnings, foreign exchange rate to current account deficit. The study’s regression analysis established that all the variables (balance on services (0.975), food export earnings (0.823) and foreign exchange rate (0.637)) were insignificant with their p-values being more than 0.05 per cent when tested at 95 per cent confidence level. The insignificance in all the variables in the study might be attributed to the use of proxy data. The study recommended the need for the government to adopt policies that can enhance earnings from food exports and balance on services in order to curtail the growing current account deficit. These policies include, value addition and diversification of food exports as well as improvement of infrastructure to aid the development of the service sector.