ABSTRACT

A constant current account imbalance in many developing nations has energized impressive enthusiasm among economists and policy makers trying to have a reasonable comprehension of the significance of current account balance. Kenya has experienced persistent current account imbalance that has remained underneath the threshold that economists would consider sustainable. At the point when a nation runs steady current account imbalance for a long period, it raises worries about its sustainability. The persevering current account imbalance 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. As a result Kenya has been using its borrowed foreign funds to finance this imbalance in the current account that yield no long-term productive gains and thus its ability to repay the debts is becoming questionable. Current account imbalances are becoming a concern of policy makers in many countries. Despite many studies done on current account balance, 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 analyse the relationship between external debt servicing and current account balance in Kenya. Understanding the precise nature of this relationship would aid policy makers with information that is vital for planning purposes, strategy formulation and proper economic management. The study was based on several theories explaining the current account balance and used annual time series data. The study utilized non experimental research design. Vector error correction model (VECM) was utilized because there was insufficient theory that connects these variables. The study found that external debt servicing granger causes current account balance in Kenya. The empirical findings showed that external debt service has significant negative effect on current account balance in the long run. The study recommends that there should be clear implementation of the medium term debt strategy. This will guard against vulnerability to external debt shocks and crowding out effect. Policies on external debt management should be carefully designed not to weaken macroeconomic fundamentals because they take long time before fizzing out.