The Relationship Between Exchange Rate Volatility and Balance of Payments in Kenya

Abstract

Exchange rate policy is considered as one of the powerful tools of economic regulation. The BOP is a record of all the transactions between the residents of the economy and the rest of the world over a period of time. The objective of this study was to determine the relationship between exchange rate volatility and BOP in Kenya. The study adopted a quantitative comparative design to determine the relationship between the two variables. The study used data from financial market players and regulators, that is CBK, CMA, NSE, banks, insurance companies, mutual and pension funds and importers/exporters. From the analysis, the exchange rate affects the prices at which a country trades with the rest of the world and is important for economic analysis and policy formulation. The study concludes that apart from the exchange rates herein discussed, there are other factors having greater influence on the levels of BOP. The study recommends that in Kenya, BOP is an important component of development because the country is a net importer. The country requires capital equipment which consumes a considerable amount of foreign currency compared to her exports. This study recommends proper policies to maintain stable exchange rates as they play an important role in determining the demand for and supply of both imports and exports. It is through exports that the country earns foreign exchange. The study further recommends that the government to promote the export which earns the country foreign exchange which can then be used to payoff imports which affects the BOP. The study also recommends that the government provides relevant structures and environment for the smooth operation of import export market in the country.