ABSTRACT
Over the past four decades, Kenya has been experiencing fiscal instability with
average fiscal deficit as percent of GDP being greater than 5 percent threshold
for developing countries. This, together with poor donors’ relations in the
1980’s, and the substitution of foreign borrowing with internal borrowing has
led to continued increase in fiscal dominance. Kenya has been unable to reach
the 10 percent economic growth target required for realization of Kenya’s Vision
2030, with annual economic growth in 2017 being 4.9 percent even with
increasing fiscal dominance. Fiscal dominance as a percent of GDP has been
moving in the same direction as inflation rate. In 2017, inflation rate reached 8
percent, a rate that is higher than 5 percent CBK target with 2.5 percent margin
on either side. Fiscal dominance remains a vital worldwide debate especially for
countries experiencing large and persistent fiscal deficit. The question being
whether or not fiscal dominance affects price stability of a country and whether
or not it stimulates economic growth in developing countries and emerging
economies with large fiscal deficits. The general objective of the study was to
determine the effects of fiscal dominance on selected macroeconomic variables
in Kenya. The specific objectives were to determine the effects of fiscal
dominance on inflation rate and to analyze the relationship between fiscal
dominance and economic growth in Kenya. The study utilized annual
quantitative time series data for the period 1976-2017. The study employed
Autoregressive Distributed Lag model to estimate the short run and long run
effects of fiscal dominance on inflation rate in Kenya. Granger causality test was
used to determine the direction of causality between economic growth and fiscal
dominance. The study found that fiscal dominance had a negative effect on
inflation rate in the current period. However, the coefficients became positive
and statistically significant at 5 percent level of significance after the first year
and in the long run. The study also found that fiscal dominance granger causes
economic growth in Kenya. Using impulse response functions derived from
restricted Vector Autoregressive coefficient, the study found that fiscal
dominance had negative impacts on economic growth in the short run but the
impact became positive in the long run. The study therefore concluded that,
fiscal dominance has adverse effects on inflation rate and on economic growth
in the short run. However, it stimulates economic growth in the long run. The
study recommends that, Central bank of Kenya should remain fully independent
to reduce fiscal dominance.
WACHIRA, P (2021). Relationship Between Fiscal Dominance And Selected Macroeconomic Variables In Kenya. Afribary. Retrieved from https://afribary.com/works/relationship-between-fiscal-dominance-and-selected-macroeconomic-variables-in-kenya
WACHIRA, PERIS "Relationship Between Fiscal Dominance And Selected Macroeconomic Variables In Kenya" Afribary. Afribary, 31 May. 2021, https://afribary.com/works/relationship-between-fiscal-dominance-and-selected-macroeconomic-variables-in-kenya. Accessed 03 Oct. 2024.
WACHIRA, PERIS . "Relationship Between Fiscal Dominance And Selected Macroeconomic Variables In Kenya". Afribary, Afribary, 31 May. 2021. Web. 03 Oct. 2024. < https://afribary.com/works/relationship-between-fiscal-dominance-and-selected-macroeconomic-variables-in-kenya >.
WACHIRA, PERIS . "Relationship Between Fiscal Dominance And Selected Macroeconomic Variables In Kenya" Afribary (2021). Accessed October 03, 2024. https://afribary.com/works/relationship-between-fiscal-dominance-and-selected-macroeconomic-variables-in-kenya