Effects Of Foreign Aid On Economic Growth In Kenya

Abstract

This study focused on the relationship between foreign aid and economic growth in Kenya. The dissertation had three objectives as follows: to establish the impact of emergency aid to economic growth, to examine the effects of concessional loans to economic growth and finally to evaluate the impact of grants to economic growth in Kenya. Extensive literature was reviewed to establish the signifiacnce of the study, highlight knowledge gaps and provide benchmark for comparison of the findings. The study would be invaluable to the various stakeholders such as policy makers and different government agencies by supplying vital information relating to foreign aid that would nurture economic growth in Kenya. The study used secondary annual time series data acquired from World Bank, Central Bank of Kenya and Kenya National Bureau of Statistics. The study sampled a period of 55years from 1963 to 2018 in Kenya. Descriptive research design was used. Time series analysis was be applied to check the relationship among the variables. STATA and MS Excel were used in data analysis. Econometric modelling was used to check the relationship between the variables. Vector Error Correction Model (VECM) was fitted. The results were consequently displayed using charts, tables and percentages. The study concluded that foreign aid had significant effects on economic growth through filling domestic savings and foreign exchange traps. The study on the effects of foreign aid has experienced mixed reactions with various scholars arriving at different conclusions. There are those researchers that are in agreement with notion that foreign aid results in economic growth of a country while others do not. Those who support such conclusions claims that foreign aid helps Least Developed Countries to grow economically and improve human development especially countries with sound political and economic policies. However, scholars who are against feels that aid creates a moral hazard problem whereby the government can spend funds without proper budget policy being sure that the donors will come into rescue in case of any financial difficulty. I recommend that the government should ensure that the loans and aid should be channeled in sectors of economy that would have significant effect on growth. Also, there should be policies and regulation in place to ensure that aid received is not embezzled or misappropriated. This in essence requires policy makers in the government, civil society and oversight bodies such as National Assembly, Auditor General, Ethics and Anti-Corruption Commission among others to be extra vigilant and judicious in ensuring that aid received is used for intended purposes.