EFFECT OF DETERMINANTS OF EXCHANGE RATE VOLATILITY ON PERFORMANCE OF HOLTICULTURAL EXPORTS IN KENYA

Abstract

Abstract: Just like many east African countries, Kenya has been active in promoting local industries that play major roles in exportation. However, despite the various legislations in the attempt to have various measures to enhance the implementation of international trade, steady foreign exchange rate unpredictability combined with cost changes have undermined these endeavors. This study therefore sought to investigate on the effect of exchange rate volatility on the performance of horticultural exports in Kenya. Specifically, the study sought to establish the effect of interest rates, inflation rates and public debt on the performance of horticultural exports in Kenya. This research study was quantitative and a descriptive research design was used. The population under study was all the 58 licensed horticultural produce exporters (Licensed by HCDA) in Kenya. Monthly export earnings for all the licensed horticultural produce exporters as provided by HCDA were analysed. This was a census study and hence no need of sampling. This study used secondary data, which was gathered from HCDA, KNBS, and CBK for the period of ten years (11 years) (2004 - 2014). Horticultural export earnings statistics data will be obtained from HCDA. Data on foreign exchange rate fluctuations was obtained from CBK while data on inflation was obtained from KNBS. This study generated quantitative data which was analysed by use of descriptive and inferential statistics. Descriptive statistics included mean and standard deviation. On the other hand, inferential statistics included multiple regression analysis. All statistical analysis was conducted with the help of Statistical Package for Social Sciences (SPSS version 21). The study found that there is a negative association between foreign exchange rate and the performance of horticultural exports in Kenya. In addition, the study established that inflation rates inversely and significantly influence the performance of horticultural exports in Kenya (β=-0.178, p-value=0.021). Further, the study established that interest rate inversely and significantly influences the performance of horticultural exports in Kenya (β=-0.167, p-value=0.042). In addition, the study established that inflation rates, interest rate and public debt inversely and significantly influence the performance of horticultural exports in Kenya (β=-0.312, p-value=0.000). The study recommends that inflation rate should be contained through sound policy measures as higher inflation rates may hurt the general export performance in Kenya. The study also recommends that the Central Bank of Kenya should set base lending rates that can help the banks profitable while at the same time not punitive to the borrowers.