IS KENYA’S CURRENT ACCOUNT SUSTAINABLE? A STATIONARITY AND COINTEGRATION APPROACH

Abstract

The objective of this paper is to examine the sustainability of the current account deficits in Kenya. In this respect, stationarity and Cointegration test was employed to ascertain sustainability of the current account in Kenya between 1970 to 2012.The choice of the set of variables were motivated by the existing theories about the long-run intertemporal budget constraint. Results indicate that Current account is stationary at levels implying that its mean reverting and temporary and that external debt is finite and sustainable. The empirical results suggest that exports and imports are cointegrated with the cointegrating coefficient of 0.21989 which is significantly not equal to one, but equal to zero, implying that the current account was not on the sustainable path indicating a weak form of sustainability. The paper concludes that Current account deficit of Kenya may not be sustainable in the long-run.