MST-Department of Economic Theory

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Browsing MST-Department of Economic Theory by Subject "Exchange Rate"

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    Impact of External Debt on Inflation and Exchange Rate in Kenya
    (Kenyatta University, 2020) Arisa, Gibson Marienga
    External financing is necessary for many low-income countries to achieve their development objective. External borrowing compliments savings and permits an economy to carry out investment activities. It is expected to provide financing necessary for investment in infrastructure and productive economic activities thus contributing to economic growth and macroeconomic stability. Kenya has depended to a great extent on external borrowing to finance its budget. Data from National Treasury and Central Bank shows that Kenya’s external debt surged from 18.8 per cent of GDP in 2013 to 30 percent of GDP as at December 2017. At the same time, exchange rate depreciated by 30.52 percent between 2010 and 2017 while inflation rose from 5.72 percent in 2000 to 8.0 percent in 2017. These show that although external debt is expected to help achieve macroeconomic stability (low inflation and stable exchange rate), this has not been achieved. There is a need to study the influence of Kenya’s foreign borrowing on macroeconomic indicators. Therefore, this study sought to examine the impact of external debt shocks on inflation and exchange rate. The objectives of the study were achieved using the structural vector auto regression model. Quarterly data from Central Bank of Kenya, Kenya National Bureau of Statistics, National Treasury, World Bank and International Monetary Fund database for the period 1993 to 2018were used. Diagnostic tests such as autocorrelation and normality were carried out to ensure robust results. The results show that a one standard deviation shock of external debt to GDP ratio results in a negative effect on inflation for about four quarters, after which the impact recovers slowly. This impact then improves consistently up to the eleventh quarter when it starts to level off. The impact does not decay even after the 12th year. A one standard deviation shock of external debt to GDP ratio depreciates real effective exchange rate. The exchange rate depreciates for the first six months, but the impact remains negative. The impact turns positive after six quarters and improves slightly for the rest of the six quarters. Therefore, an increase in external debt leads to a rise in inflation and weakening of domestic currency in Kenya. This study recommends that external borrowing should be prudently used in productive activities that can raise investments, reduced inflation and improve the country’s exchange rate. In addition, proper debt management policies should be designed to ensure a balance between bearable and durable external debt. .
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    Relationship between Tea Production, Balance of Payments and Exchange Rate in Kenya, 1996-2018
    (Kenyatta University, 2023-10) Kahure, Peris Njeri; Samuel Muthoga
    Compared to other tea producers, Kenya is the third largest behind India and China. Tea production has doubled over the last two decades due to new small-scale farmers' entrance and acreage under Tea. Tea is one of Kenya's major exports, and an increase in tea production results in higher exports, which, in turn, positively impacts the country's trade balance. A favourable BOP is crucial for overall macroeconomic stability. However, despite the continued increase in tea production and export in Kenya, the effect of foreign inflows does not seem to strengthen the Kenya shilling against the dollar. Furthermore, the balance of payment has remained negative and even deteriorating since 1996. Whether (or not) tea production affects exchange rates and balance of payment or whether (or not) the effects are eroded by increased imports of other goods, thus lowering the balance of payment, is a policy question not adequately covered in the empirical review. This study investigates the intricate relationships between tea production, balance of payments (BOP), and exchange rates in Kenya from 1996 to 2019. It seeks to shed light on the extent of these connections and their policy implications for Kenya's economic landscape. The study adopts a quantitative approach, utilising secondary time series data from reputable sources, including the Central Bank of Kenya, the East Africa Tea Auction, and the World Bank database. An Ordinary Least Squares regression model was used to estimate the model of the data. Unit root testing was carried out using the Augmented Dickey-Fuller and Phillip Perron techniques. A causality test was also performed to determine whether the variables' correlations were unidirectional or bidirectional. Through the utilisation of an Ordinary Least Square (OLS) regression model, the study unveils a significant and negative relationship between tea production and the BOP. In essence, this signifies that an increase in tea production leads to a subsequent increase in tea exports, reducing the BOP deficit. Notably, the model demonstrates that approximately 60.2% of the variability in the BOP can be explained by changes in tea production. The study also conducts Granger causality tests further to elucidate the connection between tea production and the BOP. The results reveal a one-way relationship: tea production significantly influences the BOP, while the BOP has no discernible impact on tea production. Subsequently, the study delves into the association between tea production and the Kenyan exchange rate. However, unlike the relationship with the BOP, the study uncovers that tea production has a negative, but statistically insignificant, effect on exchange rate volatility. The relationship between these variables appears to be weak, with variations in tea production accounting for just 3.6% of the changes in exchange rate volatility. Granger causality tests reinforce the findings, indicating a lack of directional causality between tea production and exchange rate volatility. In other words, changes in tea production do not lead to significant shifts in exchange rate volatility. These findings present a vital tool for the National Treasury, the Ministry of Trade and the Ministry of Agriculture in designing agricultural policies as a means of reducing the BOP deficits. There is a need for the National Treasury and Ministry of Trade to explore this linkage in managing the deficits by increasing agricultural production through policies such as subsidisation of agricultural imports like fertilisers and equipment by 1% in order to realise up to 3150.9% results.