Foreign Aid, Government Expenditure And Sectoral Gdp Growth In Kenya

ABSTRACT

Kenya has been a recipient of Foreign aid since she gained her independence in 1963. The Official foreign aid to Kenya is always issued to the government to fund government spending especially development expenditure. The rapid growth of foreign aid and government expenditure in Kenya however, have elicited concerns among policy makers on their implication on GDP growth. Foreign aid and government expenditure to the Agriculture and Forestry, Education and Health sectors have been increasing both in absolute terms and as percentage of sectoral GDP since 1980, when Kenya started implementing the Structural Adjustment Programmes (SAPs). The SAPs were introduced with the view of restoring macroeconomic stability and reviving economic growth through increased resource mobilization and more efficient use of both domestic and external public resources among other issues. Despite the fact that foreign aid flows and government expenditure have been increasing both in absolute terms and as a percentage of sectoral GDP, the sectoral GDP growth for each of the three sectors have not been consistent over the study period with all the sectors experiencing negative GDP growth in some years. In this regard, this study sought to determine the effects of foreign aid on sectoral GDP growth in Kenya; determine the effects of government development expenditure on sectoral GDP growth in Kenya and to determine the effects of government recurrent expenditure on sectoral GDP growth in Kenya The study adopted correlational research design and utilize panel data for the agriculture and forestry, education and health sectors for the period 1980 to 2012 for the following variables; GDP growth, foreign aid, Government development expenditure, Government recurrent expenditure, growth in public sector wage employment and growth in non-public sector wage employment and non-public (private) investments for the three sectors. The study also adopted Panel Generalized Least Squares to estimate the effects of foreign aid and government expenditure on sectoral GDP growth. The empirical findings, showed that growth in public sector wage employment, growth in non-public sector wage employment and private investments have positive effects on sectoral GDP growth while development expenditure was found to have negative effects on sectoral GDP growth. Furthermore, the coefficients for the recurrent expenditure and foreign aid were found to be statistically insignificant whereas all the other variables’ coefficients were statistically significant.