International Financial Flows and Economic Growth in Kenya: An Empirical Analysis

Abstract

International financial flows play a central role in development financing by enabling economies to access foreign capital, technology, markets, and liquidity needed for economic growth and investment. This paper empirically analyses the effect of international financial flows on economic growth in Kenya. The study focused on capital flight, illicit financial flows, external debt, and foreign direct investment as the main international financial flow variables. The study used annual secondary time-series data covering the period 1994–2024, yielding 31 observations. The data were analyzed using a ARDL model, with relevant diagnostic tests applied to assess normality, stationarity, multicollinearity, autocorrelation, homoscedasticity, cointegration, parameter stability, and structural breaks. The findings revealed that capital flight had a negative and significant effect on economic growth in both the current and lagged periods. Illicit financial flows also had a negative and significant current effect on economic growth. In contrast, external debt and foreign direct investment had positive and significant current effects on economic growth, suggesting that productive inflows may support growth when effectively managed. The diagnostic results confirmed that the model was generally reliable, although a significant structural break was detected in 2006. The findings provide useful insights for policymakers, financial regulators, government agencies, investors, and development partners in Kenya. The study recommends stronger control of capital flight and illicit financial flows, improved debt management, and policies that attract productive foreign direct investment.