External debt servicing and Current account balance in Kenya

Abstract

Kenya has experienced persistent current account deficits that have remained underneath the threshold that economists would consider sustainable. At the point when a nation runs steady current account deficit for a long period, it raises worries about the sustainability of this deficit. The persevering current account deficit has led to increase of liabilities to the rest of the world that are financed by the capital account surplus. These should be paid back in the long run. There is no consensus as regards the relationship between external debt servicing and the current account balance in Kenya. The main objective of this study was to analyze the relationship between external debt servicing and current account balance in Kenya. Vector error correction model (VECM) was utilized because there was insufficient theory that connects these variables. The study found that external debt service granger causes current account balance in Kenya. Policies on external debt management should be carefully designed not to weaken macroeconomic fundamentals because they take long time before fizzing out.