FOREIGN EXCHANGE RATE AS A MEDIATOR BETWEEN CAPITAL FLIGHT AND ECONOMIC GROWTH IN KENYA

Joseph Macheru Ngunjiri (Corresponding Author)

Phd Student, College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000, 00200 Nairobi, Kenya

E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Prof. Willy Muturi

College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000, 00200 Nairobi, Kenya

Dr. Tobias Olweny

College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000, 00200 Nairobi, Kenya

CITATION: Ngunjiri, J., M., Muturi, W., Olweny, T. (2018). Foreign Exchange Rate As a Mediator between Capital Flight and Economic Growth in Kenya. International Journal of Economics and Finance Vol. 7 (7) pp 1 – 19.

ABSTRACT:

The foreign exchange rate is an important tool in the economic management of a country. Its fluctuations generated by financial globalization are expected to leverage the effect of capital flight, but this seems not to happen in Kenya. Further, the loss of foreign exchange reserve resulting from capital flight means equally that some financial savings are lost to the economy. Financial globalization has offered Kenya numerous financing options to finance projects that will propel it to the attainment of the Vision 2030's main economic pillar of a 10% annual economic growth. This has led to increased external debt stock, foreign portfolio and direct investments outflows as well as profit repatriations. This study employed panel data OLS regression model to investigate the effect of capital flight on economic growth for the period 1986 to 2016 and found that there existed a negative and insignificant relationship. Baron and Kenny (1986) model was employed to investigate the mediating role of foreign exchange rate in the relationship between capital flight and economic growth. The study found that foreign exchange rate did not mediate on this relationship since one of the four conditions for mediation by Baron and Kenny (1986) was not met. The results of this study will benefit policy makers by providing them with data-based evidence that will guide them in making appropriate policies that discourage capital flight and institute proper management of foreign exchange rate to boost economic growth in Kenya.

Keywords: [Foreign Exchange Rate, Capital Flight, Panel Data Model, Financial globalization,]

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