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.