Analysis of Budget Imbalance Dynamics in Kenya

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Date
2018-11-24Author
Oguso, Alex
Mwega, Francis M.
Wawire, Nelson H.
Samanta, Purna
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Show full item recordAbstract
Kenya needs substantial and sustained fiscal consolidation to create fiscal space
for financing the government’s election pledges, the Vision 2030 development projects,
and sustainable development goals. However, the government has found it hard to sustain
its fiscal consolidation attempts. This study investigates the fiscal consolidation constraints
that act through the budget imbalance dynamics in Kenya using the Olivera-Tanzi effect approach.
The study covers the period 2000-2015 using time
series data and employs three Auto-regressive Distributed Lag (ARDL) error correction models in the
analysis. The study showed that a rise in the general price levels in the economy, adjustment of
minimum wages, rise in perceived levels of corruption in the public sector and the political budget
cycles (occurrence of a general election) worsen the budget imbalances (deficits) thus constrain fiscal
consolidation efforts in Kenya. The study also demonstrated that budget imbalance dynamics in Kenya
could partly be explained by the Olivera-Tanzi proposition. The study recommends measures to reduce
the fiscal imbalance gap in Kenya, which include controlling both supply and demand side inflationary
pressure and dealing with rent seeking behavior in the public sector