The Effect of Foreign Exchange Rate Fluctuations on Export Earnings: Evidence From Flower Industry in Kenya

Abstract

This study evaluated the effect of foreign exchange rate fluctuations on exports earnings with evidence from the flower industry in Kenya. The study used quarterly secondary data which was gathered from HCDA, KNBS, KFC, EPC and CBK for a period of ten years (2005 – 2014). The data collected was processed, analyzed, interpreted and presented in such a manner that is clear, precise and unambiguous. This data was quantified and coded using descriptive statistics. The statistical package for social sciences (SPSS 22.0) was used to describe the collected data, sort and sift through and analyze it. The results from the model show reliability of the model. The study indicated that the variations in export earnings in the flower industry in Kenya are explained by changes in foreign exchange rates, inflation rates and interest rate. The empirical results showed that there was a strong positive relationship between the study variables: the foreign exchange rate, inflation rate and interest rate. The regression results revealed that there is a positive relationship between dependent variable (log of total export earnings of the flower industry) and independent variables (foreign exchange rate, inflation rate, interest rate). From these results, the study recommended that policy makers need to maintain a robust exchange rate regime that will ensure a non-volatile behaviour. Policy measures aimed at mitigating the high exchange rate volatility to promote flower exports from Kenya need to be instituted. In order to cushion exporters from high exchange rate fluctuations, the government could set up a flower export stabilization facility. The fund could be capitalized by charging exporters a tax so that during periods of high flower prices and high export earnings, the country would accumulate the fund which it would draw down during periods of low flower prices. The flower price stabilization fund would be introduced by the government through imposition of a tax on exports. This fund would ensure predictability in flower prices so that fluctuations would not affect flower exporters drastically in future. There is need for policy makers to work towards increasing the volume of exports through diversification of market destinations by targeting local, regional and export markets as opposed to the current practice. This can be realized through regional and export market promotion initiatives as well as consistent compliance with quality standards. Innovative ways of meeting the standards and facilitation of smallholder farmers to meet these standards is required. In addition, Flower export promotion incentives such as input subsidies and tax concessions need to be considered. To reduce the relative price of flower exports from Kenya, there is need for structural reforms that contribute to increased productivity and the enhancement of international competitiveness.