Effects of Crude Oil Prices on Gross Domestic Product Growth and Selected Macroeconomic Variables in Kenya
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Date
2018-11
Authors
Kinyanjui, Antony Kibunyi
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Crude oil is one of the main drivers of economic growth and a key ingredient to sustainable development. It is therefore vital that crude oil products be efficiently and competitively priced in order to accelerate economic growth. Realization of a 10 percent economic growth in Kenya by the year 2030 requires a massive development in the energy sector. Kenya suffers from a shortage of internal energy resources, including oil and as a result, Kenya continues to be in the category of net oil importing developing countries; this subjects the economy to vulnerability to external shocks, notably oil price fluctuations, exposing the country to risks associated with oil prices such as a reduction in aggregate demand, increase in consumption price deflator and reduction in real income. This study empirically explored the effects of crude oil on GDP growth and selected macroeconomic variables in Kenya. This was achieved by investigating how crude oil prices affect GDP growth, inflation rate and real exchange rate. Literature has presented these three variables as the main indicators of economic health and key variables affected by crude oil prices. Demand for oil in Kenya has been progressively increasing since the 1970s and this is expected to increase even further from the current consumption of 4.2 million Metric tons per year to 12 million Metric tons by the year 2030. The forecasted rise in demand has been attributed to the achievement and sustainability of the desired 10 percent economic growth, as envisioned in the national vision 2030 blueprint. The study used time series data sourced from BP, WDI and CBK covering the period 1970 to 2016. This period was chosen so as to capture different oil shocks that have been shown through empirical and theoretical literature to have had an effect on the economy. The study estimated three Autoregressive Distributed lag (ARDL) models to analyse the effect of crude oil on the selected variables in the study. The findings of the study revealed that, crude oil prices have a positive long-run effect on GDP growth. This can be attributed to the fact that Kenya imports oil and re-exports it to Uganda, Rwanda and South Sudan. The findings also established that Crude Oil Prices have a positive effect on inflation in the long run, while in the short run its lag of one has the effect on inflation rate, meaning that the Crude oil prices for the previous one year affects the current year’s inflation. The relationship between crude oil prices and Real Exchange Rate was negative in the long run. CUSUM and CUSUMQ tests were also conducted and the three models were stable. The study recommends
Description
A Research Project Submitted to the Department of Applied Economics in the School of Economics in Partial Fulfillment of The Requirements for the Award of Master of Economics (Finance) in Economics of Kenyatta University, November, 2018
Keywords
Crude Oil Prices, Gross Domestic Product, Growth, Macroeconomic, Kenya