Effect Of Energy Price Liberalization On Economic Growth In Kenya (1980 – 2014)

ABSTRACT

The main purpose of this study was to determine the effect of energy price liberalization on economic growth in Kenya. Energy sector is an important component of economy, and just like other goods and services, energy price affects its demand, supply and use. The use of energy is embedded in the production function that leads to economic growth. In Kenya, the energy sector contributes about 9.49 percent of GDP with the petroleum sector, electricity sector and fuel wood sector contributing 8.4 percent, 0.6 percent and 0.49 percent respectively. Kenya has initiated a number of reforms to stabilize and promote fair price and efficiency of energy in the economy. Kenya introduced several economic reforms such as energy sector reform of energy price liberalization to promote its economic growth by stabilizing supply and prices of energy and by creating a competitive energy market. Despite implementing these reforms, the Kenyan economy has not experienced double digit rate of economic growth (Ministry of Planning and National Development, 2007). The objectives of the study were to investigate the effects of energy price liberalization on economic growth in Kenya and to find out whether there was a significant difference in stability of energy price during the period of liberalization of energy price and the period of no liberalization of energy price. The study used secondary data covering a period of 35 years from 1980 to 2014. The study extracted data from the Kenya’s Statistical Abstracts of 1980 to 2014. The study used several methods of diagnostic tests such as Augmented Dickey Fuller unit root test, Phillips-Perron unit root test, Ramsey test, Jarque-Berra test and Durbin Watson test. Phillips-Perron unit root test and Durbin Watson test were used to assure robust model estimation. Stability tests found that there was significant difference in the stability of energy price before and after the liberalization of the energy price. OLS regression estimates indicated that energy price liberalization had a negative effect on economic growth in Kenya. The coefficient value of the dummy variable was -0.1607 with a probability value of 0.0367 and suggested that energy price liberalization was significant in explaining economic growth in Kenya. The study recommended reevaluation of energy sector reform of energy price liberalization and also encouraged implementation of reforms in other sectors of the economy.