The Exchange Rate As A Tool Of Monetary Policy In Kenya: An Analysis Of The Economic And Corporate Financial Reporting Implications Of A Depreciating Exchange Rate
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The use of the exchange rate in the regulation of a country's international payments is by no means a recent occurrence. Official control over the pricing of currencies has been traced as far back as the 16th Century in Europe. At this early age the main reason for control was to maintain the wealth of citi7.ens who.held foreign assets. Since then, the exchange rate has gradually taken on a more important role as one of the main regulators of international economic relations. The use of the exchange rate in this respect has, however, not been without opposition. With the improvement in knowledge regarding the operation of the economy, critics have questioned the efficacy of the exchange rate as a monetary tool. The debate on this very contentious subject has continued to the present day. This project is an attempt to understand the subject in the Kenyan context. Section 1 surveys the exist:ing theories on the deterrnination of exchange rates under: the floating system together with an analysis of the role played by the state in determination of exchange rates in Kenya. Section 2 critically evaluates t0e efficacy of the exchange rate as a regulatory tool in economics. The findings indicate no strong link as yet between changes in the exchange rate and changes in the balance of trade or payments. Further on, a conventional approach is adopted to show the effect of devaluation on the balance of payments. In the closing stages of the section, alternative strategies for management of the balance of payments without devaluation are proposed. Section 3 explores the subject of exchange risk as it relates to firms. Seven case studies are presented of firms whose operations have in one way or another been affected by exchange rate changes. In line with this, proposal s in respect of accounting for foreign exchange items are given in this section. The latter could form the basis of a future Kenyan Accounting Standard on the subject. At the end of this section, the tax implications of exchange rate changes are explored. Section 4 deals with the very Imporant area of exchange risk management. It is imperative that company managers enter into arrangements that reduce or eliminate exchange risk if they are to avoid constant fluctuations (mostly downwards) in their profits. Two alternative strategies are presented in this regard.