Macroeconomic Variables, Government Expenditure on Infrastructure and Growth of Domestic Private Investment in Kenya

Abstract

Private sector investment in Kenya has been on the decline since independence, this is pronounced in major job creating sectors such as agricultural sector, business service sector and the manufacturing sector. Private sector has been widely accepted as an important driver of economic growth in any country across the world. The general objective of the study was to evaluate the effect of macroeconomic variables on growth of domestic private investment in Kenya. Specifically the study evaluated the effect of inflation, interest rate, money supply and exchange rates on growth of domestic private investment in Kenya. The study sought to determine if government expenditure on infrastructure moderate the relationship between macroeconomic variables and growth of domestic private investment in Kenya. This study adopted causal research design and relied on secondary data for the period 1972 to 2022. Data was collected from Kenya National Bureau of Statistics (KNBS), Central Bank of Kenya (CBK), The National Treasury and The World Bank. Autoregressive Distribute Lag (ARDL) model was adopted to examine if changes in macroeconomic variables were statistically significant to affect growth of domestic private investment in Kenya. A correlation analysis was conducted and confirmed that there was no high correlation among the variables. Granger causality test was conducted to determine whether one variable in the study was useful in forecasting another. The study results revealed that there was a negative significant relationship between inflation and domestic private investment, money supply had a positive and significant relationship with domestic private investment, Interest rates had a negative and significant relationship with domestic private investment and positive insignificant for exchange rates and domestic private investments. Further the study established that the government expenditure on infrastructure had a moderating effect on the relationship between Inflation rate, lending rate, Money supply, exchange rate and growth of domestic private investment in Kenya during the period of study. The study recommended that central bank of Kenya should seek to increase credit availability by regulating but allowing the thriving of mobile lending, group lending, micro finance lending among other credit platforms. Besides, money supply aggregates is an essential component of the monetary policy implementation framework. The variation of this money supply component through monetary policy instruments like critical reserve ratio, open market operation or central bank rate should aim at boosting private investment. The study advocates for policies that ensure the commercial banks remain liquid and maintain low lending rates. These policies include the liberation of the financial markets for more competition and support for more innovative but secure money lending avenues like mobile money markets. The study also recommended active financial market intervention through monetary policy to ensure commercial bank lending rates are within the conventional range for private domestic investment to thrive. The research also recommended that the quality of infrastructure investment should be enhanced through improvement of public investment process that will especially be effective in boosting aggregate demand and enhancing productive capacity over the long term.