Effect of Inflation On Growth of Manufacturing Sector in Kenya (2008-2017)

Abstract

Aim: This study sought to address the effect of inflation on the growth of the manufacturing sector in Kenya. Research design: The study used descriptive, correlational, and inferential research designs. The study used secondary data, specifically, from the World Bank, United Nations Conference on Trade and Development (UNCTAD), International Monetary Fund (IMF), Central Bank of Kenya (CBK), and Kenya National Bureau of Statistics (KNBS) for the period 2008-2017. Methodology: Time series data were analyzed quarterly using EViews software. The study employed descriptive statistics, correlation analysis, and regression analysis. Pre-test analysis entailed Augmented Dickey-Fuller (ADF) tests for unit root, Bai-Perron Multiple Breakpoint tests, and Bounds Cointegration tests. The post-test analysis included the Breusch-Godfrey tests for autocorrelation, the Breusch-Pagan-Godfrey tests for heteroscedasticity, Variance Inflation Factors (VIF) tests for multicollinearity, Jarque-Bera statistics tests for normality, and CUSUM tests for model stability. Results: The regression model estimates for inflation were (-0.19269, p<0.05). The results imply that holding other factors constant, a unit increase in inflation reduces manufacturing value-added by 0.19269 units. Conclusion: Inflation has a statistically and significant negative effect on the growth of the manufacturing sector in Kenya. To achieve manufacturing value-added growth, the study recommends that the Central Bank of Kenya (CBK) should have inflation targets and adopt appropriate monetary policies to monitor fluctuating inflation rates. Furthermore, the CBK should keep lending interest rates as low as possible so that manufacturers incur less on acquiring credit from commercial banks and ultimately produce goods at affordable prices.