The determinants of the trade balance in Kenya: An Empirical analysis(1970-2010)
The Kenya Economy has been characterized by persistent trade balance deficit over a long period of time despite the various initiatives that the Government has been undertaking to promote exports with the aim of arresting this situation. This study empirically investigated the determinants of Kenya's Trade Balance for the period 1970 to 2010 with specific objectives of estimating the factors that determine Kenya's Trade Balance and the nature and strengths of the relationship between Trade Balance and its determinants. Data was collected on Trade Balance, Real exchange Rate, Government Consumption Expenditure, Domestic Income, Income from the rest of the world, Foreign Direct Investment and Money supply. The Trade Balance model developed by Himmarios (1989), Bahmani-Oskooee (1989) and Buluswar et. al (1996) and OLS model estimation using annual data on trade balance from 1970 to 2010 showed that Real Exchange Rate, Government Consumption Expenditure, domestic income and Money Supply are significant determinants of Kenya's Trade Balance for the period in question as opposed to foreign income was found to be statistically insignificant. The study recommends that, the Government must invest in productive sectors of the economy to increase exports and even add value to these exports so that they become competitive in international markets in line with the aspirations of the economic blue print, Kenya Vision 2030. Further, the Government should create conducive environment in the country by fighting corruption in order for it to attract FDI from abroad and even properly manage the exchange rate.