The Link Between Food Import and Cereals Production in Kenya: Evidence from Cointegration and Granger Causality Analysis Using Time Series Data

Abstract

Kenya is the leading economy in the East African Community (EAC) and its economy significantly depends on agriculture both directly and indirectly. Approximately 45% of her revenue is derived from agriculture. Besides employing about 60% of her populace, the sector provides over 75% of industrial raw materials and slightly above 50% of the economy’s export earnings. This sector is however, facing a myriad of challenges such as low purchasing power of the population due to high poverty level, frequent drought, high cost of inputs and high global food prices. This situation among other factors, has forced the government to rely on food aid and to divert her foreign exchange reserves and resources earmarked for development to procurement of food. However, the underlying question would be, if Kenya is relying on food aid which is noted to have little effect on local production of food but rather displaces imports, what then is the causality between the food import and food production?  This paper sought to address the above question. The study was anchored on the ideas of classical economists, particularly the concepts of production and consumption.  It was based on diagnostic research design. Time series data from the World Bank for the period 1976 to 2013 were employed. Granger causality test was undertaken to establish the directional causality between food import and cereals production. This was done by estimating Vector Autoregressive (VAR) models. Vector error correction (VEC) models were also estimated to assess the possibility of long run relationship between the variables and Wald statistics for possible short run relationships. Other econometric tests included: Normality using Jarque-Bera statistics, Breusch-Godfrey LM Test for serial correlation and the ARCH test for Heteroskedasticity. The study revealed bidirectional causality between food import and cereals production in Kenya. In addition, food import had long run causality on cereals production. On the other hand, cereals production had no long run causality on food import, though there was short run causality running from cereals production to food import. The negative significant short run relationship between cereals production and food import imply that food import may react to cereals production, a likely indication that cereals production my alter food import in the long run. The country should thus enhance cereals production to reduce food imports which could be ascribed to food shortage in the economy. This study may be a source of literature for econometricians and help in policy formulation to address the food insecurity situation in the country.

Keywords: Causality, Cointegration, Food Import, Cereals production, Kenya