The effect of foreign exchange rate fluctuations on horticultural export earnings in Kenya

Abstract

Kenya‟s horticultural export sector is a key sector with regard to sector contribution to the country‟s economy. This sector‟s primary market is Europe. Being a foreign market, this presents an issue in that the primary market‟s currency is different from that of the exporting country - Kenya and this brings in the issue of foreign exchange rate. Kenya operates under a floating exchange rate system where the exchange rate of the country is determined through forces of demand and supply for the local currency. This means that the local currency keeps fluctuating against other world currencies and for this case, the currencies of the primary market for the horticultural sector in Kenya. The objective of this study was to determine the effect of foreign exchange rate fluctuations on horticultural export earnings in Kenya. This study adopted the use of secondary data to achieve the stated research objective. Horticultural export earnings from HCDA were analyzed together with the Exchange rates (Kshs Vs USD) obtained from Central Bureau of Statistics for the period January 2009 to December 2013. The model adopted for this study also included inflation indices and foreign direct investment as a percentage of GDP statistics to derive a wholesome understanding of how these factors affect or relate to horticultural export earnings in Kenya. Multiple regression was employed to determine the relationship between Horticultural export earnings and foreign exchange rates, inflation indices and Foreign direct investment as a percentage of GDP for the period 2009-2013. The findings of this study concluded that the exchange rate is associated with horticultural export earnings in Kenya. The Pearson correlation was 0.689. It can therefore be concluded that the fluctuations in foreign exchange rates largely affect horticultural export earnings in Kenya. The government needs to come up with structures to support horticultural export performance in Kenya. Policy makers should create an enabling environment to maintain and sustain a stable exchange rate system that is resistant to external shocks. There is need for the government to develop and implement policies that lead to export diversification. There is also need to boost supply in the horticultural sector through incentives and subsidies that will lead to lower costs of production. With regard to further research, other studies should be done in this research area to ascertain the effect of other factors not accounted for in this study on horticultural export earnings in Kenya. The study period for this research was 5 years. A longer duration of time could be considered in another research study to establish if the results will remain consistent with the findings of this study or if they will be varied.