Econometric Analysis of Fiscal Performance in Kenya

Improving fiscal performance by reducing budget deficits has for long been at the heart of many governments in developing countries. Budget deficit in all cases whether monetized or not, tends to generate inflationary pressures triggering uncertain crisis in an economic system. Majority of the developing nations, Kenya inclusive have had a dismal performance by attracting negative budget balances over the years. To contain fiscal vulnerabilities, there is need to understand factors behind fiscal performance in Kenya. The objectives of this study are to establish the trends and extent to which these factors determine fiscal performance in Kenya. The study employed unrestricted Vector Autoregressive (VAR) model in estimating how macro-economic, political and institutional factors affect fiscal balance using longitudinal data collected, consolidated and analysed for the period 1963 to 2013. In the short run, both the first and the second lags of fiscal balance, Treasury bill, Tax revenue and inflation significantly influenced fiscal balance. On the other hand, only the first lags of real gross domestic product per capita growth rate, the first differences of the Total Debt service and the Gross Government Investment affected fiscal balance significantly whereas only the second lags of the first differences of both the current account and the ratio of broad money to GDP were found to significantly determine fiscal balance. The study suggests therefore that the government should intervene through refocusing on the existing fiscal policies to mitigate the anticipated future problems likely to be associated with the existence of unchecked behaviors of these determinants. Finally, the government and the relevant agencies need to consider adjusting Treasury bill rates downwards to increase fiscal balance. As well, the government should be able to encourage internal investment by the local and encourage internal borrowing at affordable interest rates. This may ultimately spur economic growth through varied sectors of the economy. The study emphasises on sound fiscal policy which is a critical determinant of long-term economic success and recommends Kenyan government to balance her financial affairs and avoid imposing a tax burden. Tax burden becomes a disincentive for people to work hard, save, invest, and be entrepreneurial, while still ensuring adequate and efficient public services.