Determinants of Coffee Export Performance in Kenya

Abstract

Coffee sector is a very important sector that contributes to Kenya’s foreign exchange earnings, creates employment opportunities and overall economic growth. Understanding the factors that influence coffee export performance is Key towards realizing economic growth and development. This study investigated the determinants of coffee export performance in Kenya which include; world real gross domestic product, trade openness, institutional quality, export capacity, domestic production of coffee, world production of coffee, inflow of foreign direct investment and real effective exchange rate. The study utilized time-series secondary data for 38 years from 1980 to 2018. Error Correction Model (ECM) was employed in the analysis due to presence of cointegration among the variables. Pre-and post-diagnostic tests were used to ascertain the validity of the ECM results. Further ADF test was used to test for stationarity of variables as non-stationarity leads to spurious regression. The post-diagnostic tests conducted included heteroscedasticity and autocorrelation tests to ensure fitness and reliability of the model. The study established that there are both short run and long run factors influencing coffee exports earnings in Kenya. Institutional quality and the real effective exchange rates positively influence coffee exports earning in the short run and in the long run. On the other hand, domestic production of coffee positively influences coffee exports earnings in the long run factors whereas world real gross domestic product exhibited inverse relationship with coffee exports earnings. The findings of the study recommend adoption of government policies that promotes better institutional management, reduction of corruption and respect for the rule of law. The study further recommends that the government should support farmers by providing subsidies of farm inputs as well as investing in agricultural extension services and research and development towards enhancing coffee production. In an effort to improve the competitiveness of coffee exports, the government through the monetary institutions should consider competitive exchange rate regime, probably devaluation of Kenyan currency in favor of coffee exports.