The Effects Of Exchange Rate Fluctuations On Export Earnings Of Coffee Industry In Kenya

Abstract

Kenyan coffee has been among the top five of the country’s agricultural exports and it is known to contribute greatly in Kenyan economy by employing about 5 million Kenyans either directly or indirectly. Its 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 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 coffee sector in Kenya. The objective of this study was to determine the effect of exchange rate fluctuations on coffee export earnings in Kenya. This study adopted the use of secondary data to achieve the stated research objective. Coffee export earnings from CoBK were analyzed together with the Exchange rates (Kshs Vs USD) obtained from Central Bank of Kenya for the period January 2005 to December 2014. The model adopted for this study 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 coffee export earnings in Kenya. Multiple regressions were employed to determine the relationship between coffee export earnings and the exchange rates, inflation indices and foreign direct investment as a percentage of GDP for the period of 2005-2014. The results proved that fluctuations in exchange rates and Foreign Direct Investments as a percentage of the GDP largely affected coffee export earnings in Kenya.