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Name:Sustainability of current account deficits in Kenya
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The Kenya Vision 2030 aims to transform Kenya into a globally competitive and
prosperous nation with a high quality of life by the year 2030. Its competitiveness
depends on, among others, the performance of its current account. Kenya’s
current account is a persistent under-performer and has recorded a huge deficit
to the tune of 18.7 per cent of GDP in the year 1998, and recorded a surplus only
twice in the accounts lifetime. Its recent performance raises concern because,
since the 2003 surplus, it has been on an unabated downward trend, which has
brought it to a deficit greater than 10 per cent since 2011. Weighed against the
international threshold of 5 per cent of GDP, Kenya’s deficit raises serious doubt
on its sustainability. This study uses data between the years 1975 to 2011 and
the intertemporal approach to the current account to test the sustainability of
Kenya’s current account deficit. It tests the existence of a long run steady state
by way of cointegration of the exports and imports, as constituted in the current
account. The test fails to find cointegration between the two variables, leading to
the conclusion that the current account deficit is unsustainable. This implies that
there is a possibility of a reversal, which may develop to a crisis. It recommends
urgent policy interventions to avert this possibility.

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Created On: 09/18/2014 10:38
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