Effect of Exchange Rate Fluctuations on Export Earnings of Kenya Tea Development Agency Factories
Abstract
The performance of firms involved in international trade is significantly affected by
exposure to changes in exchange rates. In addition, these fluctuations influence the
ability of local firms to compete with those of other nations. The tea sector in Kenya
contributes 10% of GDP and 90%of the tea produced is exported. KTDA accounts for
more than 60% of all tea exported from Kenya through the tea auction at Mombasa.
Owing to dependence on export markets Kenya’s tea exports are exposed to
fluctuations in exchange rates on two levels. First at the time the export contracts are
entered for sale of tea the rate of exchange rate may change by the time payment is
received from the importer. Secondly when the sales proceeds are received in foreign
currency the exchange rate is different from the time they are converted into Kenya
Shillings. This research sought to establish whether changes in exchange rates affect
how much KTDA earns from tea exports. The study used data on earnings at the time
the contact was signed between the KTDA and the importer. Descriptive research was
used which suited since the research was analyze the relationship between variations
in exchange rate, export earnings from tea and prevailing inflation. Data was obtained
from KTDA Kenya National Bureau of Statistics and Central Bank of Kenya.
Regression analysis was applied to establish the association among the variables.
Regression output reveal that there is a correlation between exchange rate and tea
export earnings with a correlation factor of 0.221. The results obtained from the
regression analysis show the model statistically reliable to predict the dependent
variable since the F significance was 0.003. The relationship between export earnings
and exchange rates was positive while it is negative with monthly inflation. The
results also indicate there could be other variable that were not included in the model
since the constant in the derived equation is a negative value. The study recommends
that for policy makers in the tea industry to ensure there is stability in earnings by
having tools to address the negative consequences of exchange rate volatility. A more
stable exchange rate will mean less exposure to export earnings. The players in the tea
sector should change employ measures aimed at minimizing the variability in
earnings caused by exchange rate fluctuations among them expanding existing
markets, increasing consumption and improving quality.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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