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.