The effects of exchange rate liberalisation on the balance of payment of a developing country: a case of Kenya
Simiyu, Mungami Eddie
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Exchange rate is one of the macro economic fundamentals that play a key role in ensuring that the economy of a country remains competitive in the international market. It plays an important role of efficiently allocating and use of economic resources hence ensuring a country remains competitive externally. The exchange rates are important in improvement of the balance of payment. The study was concerned with the effects of exchange rate on the balance of payment. Primary data was used in the study to determine the effect of exchange rate liberalization on the balance of payment components from selected companies. Secondary data was used to analyse the effect of exchange rate on the overall balance of payment performance. Descriptive statistics was used to analyse data. Graphical representation of the balance of payment was also drawn. The results show that the exchange rate liberalization has improved the overall balance of payment but it has not improved the current account or reduced the balance of trade deficit as envisioned by Bretton woods institution. The study found out that the exchange rate liberalisation had a negative effect on the companies export sales due to wide fluctuations that make planning hard and losses that are incurred as a result of the fluctuations that make planning hard and losses that are incurred as a result of the fluctuation. Most companies do not employ any hedging mechanism hence bear the brunt of the upswing and downswing of the shilling. The firms factored in their prices the adverse effect of the exchange rate fluctuation. The study recommends that the Central Bank of Kenya use target zones to reduce wide fluctuation of the shilling against other currencies. The government of Kenya should link with neighbouring countries to hasten regional integration by harmonizing the fiscal and monetary policies and possibly creation of a single currency that will completely eliminate exchange rate fluctuation. The study also recommends development of forward, futures and options markets. These markets will enable the companies to certainly forecast the expected exchange rates in the future hence facilitate planning.