Analysis Of The Relationship Between Expenditure On Oil Imports And Public Spending On Selected Social Services In Kenya

Since independence, oil imports in Kenya have been rising mainly to sustain the nascent transport, manufacturing, energy, agriculture and maritime sectors among other uses in the country. The growth in the country’s oil import bill has however been closely related to public spending in the health and education sectors which experienced shocks owing to the growth in expenditures apportioned to the rising volume of oil imports. Given the significance of the social pillar of the Kenya Vision 2030 and the inconsistency in the progress towards achieving the Sustainable Development Goals, which is inherent in the Kenya Vision 2030, understanding the linkages between the aforementioned trends in expenditures can help in explaining the progress towards attaining the education and health facets of the social pillar. The purpose of this study was to analyze the relationship between aggregate expenditure on oil imports and government expenditures on health and education. The specific objectives of this study were to: estimate the relationship between the aggregate expenditure on oil imports and government expenditure on health; and estimate the relationship between the aggregate expenditure on oil imports and government expenditure on education. The data used was annual aggregate expenditure on oil imports; government expenditure on health; government expenditure on education; exchange rate; and oil prices. The data was sourced from Kenya National Bureau of Statistics, Central Bank of Kenya and World Bank. The study employed granger causality and correlation analysis on the annual time series secondary data spanning 55 years from the year 1963 to 2017. The findings of the study revealed that there exists bi-directional causality between government expenditure on health and aggregate expenditure on oil imports on one hand; and a unidirectional causality running from government spending on education to aggregate expenditure on oil imports on the other hand. They are therefore not independent of each other. The findings were based on standard Chi-square tests and F-tests and revealed that there were causal relationships between the pairs of expenditure variables both in the long-run and short-run. The increase in government expenditure on health and education is however a measure to cushion the society from any education and health related adverse effect following an increase in expenditures on oil imports. On the other hand, education and health sectors are key in the upward surge of oil import demand which in turn increases expenditures on oil imports in the country. The increase in government spending on health and education is also attributed to oil price shocks and exchange rate variations in a situation that can not only lead to inflation but also the prices of imports in the country. The general increase in the prices of goods and services in the country forces the government to increase spending in the health and education sectors to prevent a social crisis. While the rise in the volume of imported oil seems indispensable, the government needs to focus on the increase in the prices of imports that is triggered by exchange rate fluctuations as well as the inflation that is triggered by global oil price shocks.