The Relationship Between Exchange Rate Volatility and Volume of Tea Exports in Kenya

Abstract

The Agricultural economy accounted for 26% of the Kenyan GDP in 2016 and as such was a major contributor towards the economic performance of export trade in Kenya. Agricultural produce is fundamental to Kenya's export sector with tea and horticultural produce being the key export products. Kenya exports her tea to United Kingdom, Netherlands, Pakistan, United States of America, Uganda and Tanzania. Approximately 90% of the tea produced in Kenya is exported. The currency adopted for the auction of tea in international markets is the USD. Kenya has adopted the floating exchange rate system where an exchange rate is determined by market forces of demand and supply for foreign currencies implying the value of the local currency is never constant. This research study sought to study the relationship between exchange rate volatility and the volume of tea exports in Kenya. The descriptive research design was used to conduct this assessment. Data used was collected from the Central Bank of Kenya, the Kenya National Bureau of Statistics and the Agriculture & Food Authority, Tea Directorate. Data was presented using tables. A multiple regression model was applied to establish the relationship between the dependent, the independent and the control variables. Correlation analysis and coefficient of determination were used to determine the significance of the model adopted. The results of the regression analysis established the relationship between the variables. The coefficients that corresponded to inflation rate, tea prices and tea production were positive implying that there was a positive relationship with the volume of tea exported in Kenya while exchange rate volatility was negative implying a negative relationship with tea exports in Kenya. The research concluded that exchange rate volatility had a weak negative relationship with the volume of tea exports in Kenya. The research recommended that policies that encourage export trade be formulated and adopted as they would boost export trade.