EFFECT OF SELECTED MACROECONOMIC VARIABLES ON THE GROWTH RATE OF TOURISM SECTOR IN KENYA

Abstract

Tourism has evolved into a vital sector of Kenya’s economy by contributing to employment, alleviation of poverty, Gross Domestic Product (GDP), foreign exchange earnings, and a balance of payments surplus. Tourism is a productive economic activity that needs a stable macroeconomic environment for continued growth. Kenya’s Vision 2030 highlighted tourism among the economic pillars that will spur its achievement. The vision posits an annual growth rate of 10%. However, since Kenya’s Vision 2030 formulation, the annual growth rate in the tourism sector has been below 10 percent; besides, the sector has experienced unstable and fluctuating growth. Thus, there was a need for a study to be conducted to examine whether levels of government expenditure and taxation are constraining the tourism sector’s growth rate. The study's main objective was to investigate the effect of selected macroeconomic variables on Kenya's tourism sector’s growth rate from 2012 to 2021. The study specifically sought to examine the effect of recurrent expenditure on the growth rate of tourism sector, investigate the effect of capital expenditure on the growth rate of tourism sector, determine the effect of taxation on the growth rate of tourism sector, and finally to establish the moderating role of currency exchange rate on the nexus between the selected macroeconomic variables and tourism sector’s growth rate. Using a causal research design with time series data from the Kenya National Bureau of Statistics, the study employed EVIEWS software version 10 for descriptive statistics, correlational analysis, and multiple regression analysis. Correlation analysis indicated positive relationships between the tourism sector's growth rate and recurrent expenditure (0.5144), capital expenditure (0.3837), and taxation (0.0237). Augmented Dickey-Fuller test showed integrated levels at I(0) and I(1), while F-Bounds tests revealed no cointegration among variables. Multiple regression analysis confirmed the significant positive effects of recurrent and capital expenditures, as well as taxation, on the sector's growth rate, with coefficients of 0.4848, 0.8525, and 0.2415, respectively, at a 5% significance level. However, currency exchange rate was found to exert no moderating effect on the relationship between the selected macroeconomic variables and tourism sector’s growth rate. The post-estimation diagnostic tests indicated that data was normally distributed, autocorrelation did not exist, and the regression residuals were homoscedastic, and not serially autocorrelated. The CUSUM test demonstrated that the model was fit for policymaking. Based on the empirical findings, the study suggests that the Kenyan government should enhance its budget allocation for recurrent and capital expenditures, and consider expanding its taxation volume to stimulate the growth rate of the tourism sector.