MACROECONOMICS FACTORS AFFECTING THE LEVELS OF FOREIGN EXCHANGE RESERVES IN KENYA
Abstract
The general objective of this study was to investigate the factors that affect the levels of foreign exchange reserves in Kenya. The real inspiration of the study was based on the fact that the continuous high appetite for external loans to finance budget deficit/mega infrastructures in the country has been of concern to economists in the Kenyan economy. To achieve the objectives of the study a methodology framework of autoregressive distributed-lag (ARDL) was undertaken to investigate on year period from 1995 to 2019. Descriptive statistic research design was used. Secondary data collected from the World Bank website, CBK website and WDI website was employed. Data analysis was done using the E-views 11 software and results presented in form of tables. The findings revealed a long-run relationship among all the variables. Moreover, log of BOP, external debt, remittance and debt servicing in the long run have significant impact on the stock of foreign reserves while GDP and nominal exchange rate are insignificant. Time series properties were tested such as the presence of unit roots and co-integration of the variables to ensure that spurious results would not result. Before interpreting the results, the estimated models were subjected to pre and post diagnostic test. Some of the diagnostic tests conducted were residual normality test, multicollinearity test, serial correlation test, regression specification error test, model stability and normality tests. The study concluded that reserve build-up in Kenya is mainly a function of growth in GDP, remittances in the short-run and external debt. In addition, the long-run coefficients showed that remittances, Lag of BOP, nominal exchange rate (NEXCR), external debt and debt servicing exhibits negative significant effects on the foreign reserves stocks in the long run, with growth in GDP exhibiting a positive though insignificant effect on foreign reserves stocks. Nominal Exchange rate (NEXCR), have a negative sign showing an inverse relationship with reserves holdings, although statistically insignificant. The insignificance of nominal exchange rate was taken to indicate Kenya’s exchange rate is somehow managed by the CBK for some period. External debt and debt servicing having a negative effect on the stocks of foreign reserves affirms the position Kenya find herself due to accumulation of too much foreign dominated debt. Debt servicing eats into the foreign reserves stocks since the external debt is repaid in foreign currency thus putting a constraint on the stock of Kenya’s foreign reserves in the long run.
Keyword: Debt Servicing, External Debt, Remittances (from abroad), Current Account, GDP, Foreign Reserves
CITATION: Keinan, F. G., & Muturi, W. (2023). Macroeconomics factors affecting the levels of foreign exchange reserves in Kenya. The Strategic Journal of Business & Change Management, 10 (2), 260 –276.
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DOI: http://dx.doi.org/10.61426/sjbcm.v10i2.2602
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