Relationship Between External Financial Resource Inflows And Economic Growth in Kenya

Abstract

Economic growth is about better standards of living, lower unemployment levels, reduced government borrowing and attracting investment. Kenya has employed a number of strategies to fulfill this objective. The purpose of the study was to investigate the relationship between external financial resource inflows and economic growth in Kenya. The specific objectives was to establish the relationship between official development assistance, foreign direct investment, diaspora remittances, external debt and economic growth in Kenya. The study adopted a descriptive research design. To realize the set objectives, data was collected on the rate of economic growth, official development assistance inflows, foreign direct investment inflows, remittances from the diaspora, net external debt inflows, gross domestic saving and population growth rate in Kenya. Secondary data from Kenya National Bureau of Statistics, Treasury bulletins, Central Bank of Kenya, International Monetary Fund and World Bank was used. The study used data from 1975 to 2015. The quantitative data was analyzed using stata statistical software. Econometric modeling was used to establish the relationship between the variables. Vector Error Correction Model (ECM) was fitted. Study results indicated that FDI had a significant relationship with GDP growth. However, findings revealed that ODA, diaspora remittances and external debt did not have a significant relationship with GDP growth. The following recommendations are made. First, the government should improve the ease of doing business, reduce regulation and licenses required to register businesses and ease the tax regulations to make the country able to attract more FDI. Secondly, the government should have effective policies to ensure that ODA is channeled to high growth sectors that can have a significant effect on GDP growth. Similarly, the study recommends to the government and financial sector to have effective regulations and policies to ensure that any remittances received into the country from diaspora are invested into productive sectors. Lastly, government should ensure that external debt is only sought as a last resort. Similarly, any borrowed funds should be invested in productive sectors that will generate revenue to enable repayment of such debt.