Macroeconomic Determinants of Private Investment in Kenya: An ARDL Approach (1980-2023)

Abstract

Private investment is one of the main contributors to economic growth and development in both developed and developing countries. As a result of this Kenyan government in 2023 pursued several tax and regulatory reforms aimed at improving the investment climate, including removing the VAT on exported services, reimbursing verified tax refund claims within six months, and increasing credit access to the private sector. This study sought to assess the determinants of private investment in Kenya over the period from 1980-2023 to determine the key factors that may have enhanced or constrained the private investment growth. To achieve this, this study employed the Autoregressive Distributed Lag (ARDL) technique. The findings demonstrate that GDP per capita, credit to the private sector, and openness, with significant coefficients (all at 0.05 level) of 0.930, 0.229, and 0.409, respectively, have a positive effect on private investment, while external debt and real interest rate with coefficients as -0.186 and -0.143, respectively, have negative effect on private investment in the long-run. In addition, the results show that External debt, GDP per capita, credit to the private sector, and openness, with significant coefficients of 0.147, 1.438, 0.286, and 0.325, respectively, have a positive effect on private investment, while the real interest rate, with a coefficient of -0.325, hurts private investment in the short run. It is herein recommended that policies that contribute to GDP growth, improved credit to the private sector, reduced external debt, more openness, and reduced real interest rate shall boost the level of private investment in Kenya.