Effect of Diaspora Remittance on the Exchange Rate in Kenya

Abstract

Diaspora remittance plays a crucial role in the economies of developing countries, offering a lifeline to millions of families and contributing to the nation's foreign reserves. The aim of this study was to investigate the effect of diaspora remittances on the exchange rate in Kenya. The study was guided by the following theories; the Balance of Payments theory, the Portfolio Balance approach, and the Pure Altruism theory. This study adopted an empirical research approach, utilizing data examination to determine the connection between diaspora remittance and exchange rate. The population of the study comprised the datasets provided by the Central Bank of Kenya and the Kenya National Bureau of Statistics between the periods of January 2018 to December 2022. Using the data collection sheets, the researcher collected secondary data on exchange rates and remittance inflows and on other relevant variables that affect the exchange rate, which include imports, exports, interest rates, and GDP. Using Ordinary Least Squares (OLS), this study examined how remittances from the diaspora affect the exchange rate. The findings indicated that there is a positive relationship between diaspora remittances and exchange rate. This was evidence by a regression coefficient of 74.215 (p=0.000). Also the control variables also exhibited significant relationships with the exchange rate where imports and interest rate had a positive significance (8.738, p=0.000), (1.590, p=0.000) respectively. On the other hand, GDP growth rate displayed a negative relationship, with higher GDP growth associated with a lower exchange rate (-0.622, p=0.000). The study concluded that a strong and positive relationship was observed between diaspora remittances and the exchange rate in Kenya. The control variables, including imports, GDP growth rate, and interest rate had a significant relationship with the exchange rate. Based on the findings, the study recommended that policymakers should actively promote and facilitate remittances from Kenyan nationals living abroad. Streamlining remittance processes, reducing transaction costs, and offering incentives to encourage remittances can help boost foreign exchange inflows, contributing to a stronger exchange rate.