Selected Macroeconomic Variables and Private Sector Investment in Kenya: an Empirical Analysis
Abstract
For developing economies, structural reforms aimed at improving financial intermediation and
private investment were prescribed as necessary preconditions for growth and development. In
Kenya, massive reforms to enhance private capital formation have been gradually rollout since
the 1980s. Savings mobilization and credit access have improved but are not at desired levels.
Public borrowing to finance fiscal deficits and investment on social and development projects
have both aided and restricted private investment. Despite being one of the fastest growing sub-
Saharan African economies, private investment in Kenya is below projected levels. The study
adopts a Descriptive Research Design, using correlation and multivariate regression estimation
techniques to observe and explain the relationship between domestic savings, lending interest
rate, public debt, Real GDP, and private investment in Kenya. Using domestic savings and cost
of commercial credit as proxy variables for financial intermediation, the study finds the
relationship between private investment, domestic savings, and lending interest rates to be
significant and positive, a confirmation of financial liberalization hypothesis. The study
empirical assessment of public debt and private investment estimates an inverse linear
relationship, consistent with crowding out theory. Real GDP and private sector capital
formation relationship was observed to be positive but statistically insignificant. The paper
recommends that fiscal policy should be rationalized towards revenue expansion and external
concessional borrowing. Public borrowing domestically should be minimized to expand private
credit and crowd in private investment. Regarding financial intermediation, monetary policy
should prioritize moderating inflation to low and stable levels. This would facilitate the
realization of positive and stable real interest rates, which will be instrumental to the
inducement of higher savings, expansion of private credit, and enhancement of private sector
investment.
Publisher
University of Nairobi
Subject
Selected Macroeconomic Variables and Private Sector Investment in Kenya: an Empirical AnalysisRights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1422]
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