Analysis of import demand elasticities for Kenya: 1970 to 2013
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Date
2015-01-28
Authors
Kamau, Penina Waithira
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Abstract
There was continued increase in imports volume and shrinking of exports. Due to
government preoccupation with mobilizing external financial assistance, debt
increased tremendously. The problem of growing population in Kenya, heavy
importing and borrowing has led to current account deficit. Information on import
demand elasticities was key to informing the tax policies that were to guide the
taxation of imports and deciding optimal imports. The specific objective of the
study were to estimate price elasticity of demand for imports, income elasticity of
demand for imports and foreign exchange reserve elasticity of demand for imports
The study analyzed the import demand elasticities using time series data from
1970 to 2013. Secondary data was used in the study. Data was collected from
Central Bank of Kenya and Kenya National Bureau of Statistics documents. A
multiplicative import demand function was estimated from which import
elasticities were determined. The results show that income, relative price and
foreign exchange reserve affect imports value. Long run elasticities were estimated
and the coefficients of the variables were statistically significant expect for relative
price. All the long run elasticities were found to be inelastic. Value of imports,
relative price, income and foreign exchange reserve were co integrated in long run.
The Kenya Revenue Authority can increase revenue collection from import duties.
This was because import income elasticity for Kenya in long run was inelastic
implying that imports responds to income is less than proportional. Export
promotion policies should be encouraged as they increase foreign exchange
reserves. This is because the results show that import demand respond to foreign
exchange reserve. Borrowing efforts should be discouraged given that foreign
exchange reserves elasticity was inelastic. This would improve balance of
payments due to reduction in debts. Government can utilize imports of the
previous period to forecast levels of tax revenue and also determine import
behavior. This was because the lagged value of imports highly influences the
demand of imports in Kenya.
Key words: Import demand elasticities, GDP
Description
Masters in Economics-Department of Applied Economics, 48p. October 2014