Influence of Monetary and Fiscal Policies on Construction Output Levels in Kenya

Abstract

Construction output is a key indicator of the health of an economy and should therefore be well managed to enhance its functionality in the economy. However, in Kenya, empirical evidence on the influence of monetary and fiscal policies factors - such as interest rate, inflation rates, foreign exchange rates, tax rates and government spending on construction - is limited. This in turn limits the government‟s ability to manage construction output in the country. This report presents an empirical study showing objectively how fiscal and monetary factors actually affect construction output, and how these can be used as the basis for policy decisions on the management of the output. In this study, the researcher aimed to investigate the influence of monetary and fiscal policy factors on construction output in Kenya. The study objectives were to describe the factors, to compute correlation coefficients amongst the stationary series of the variables and to regress the construction output on the factors. Data for the study were obtained from Kenya National Bureau of Statistics and Central Bank of Kenya, and were time series in nature. The data were collected using a data sheet, and they cover a period of fourteen (14) years; year 2000 to year 2013, on quarterly basis. The variables in the study were inflation rates, Kenya shilling per US dollar exchange rates, total tax on products, commercial banks‟ weighted interest rates, government expenditure on construction and construction output. The data analysis involved graphical analysis, tests of stationarity and regression analysis. Construction output was regressed on the explanatory variables, applying the first differences of monetary policy factors and natural logarithms of the first differences of fiscal policy factors. It was observed that the explanatory variables had no significant influence on construction output of the country‟s construction industry in the current quarter. A model describing this relationship was developed which has a coefficient of determination (R2) of 0.11. This value shows that the regression model has low explanatory powers and hence it was not logical to conclude that the xiv factors had influence on construction output in Kenya in the current quarter. However, it is clear that the impacts of these factors are usually felt by the industry much later after the policies‟ implementation. This is demonstrated by a regression model of lagged explanatory variables which has a coefficient of determination (R2) of 0.21 which included lags up to the 12th lag. On the basis of these results, it is concluded that the monetary and fiscal policy factors can be used as effective policy instruments to control and manage construction sector in Kenya. It is recommended that construction sector experts and stakeholders should ensure construction projects, especially those taking more than two years are properly appraised and all these monetary and fiscal factors are well captured in the feasibility study and appraisal.