The effect of exchange rate volatility and selected microeconomic variables on export performance of tea firms managed by Kenya tea development agency in Kenya
Chirchir, Francis Kipkoech
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The purpose of this study is to empirically establish the effect of Exchange rate volatility and selected micro-economic variables on export performance of Tea firms managed by Kenya Tea Development Agency in Kenya in an export demand framework which includes foreign exchange rate, domestic tea prices, tea substitute prices, size of tea firms and foreign incomes (foreign economic demand). The problem of exchange rate volatility has given rise to a broad debate in the economics, and finance professions in many parts of the world. In Kenya, the subject has been at the center of current economic policy debate for the past decades, involving policymakers, the business community, academic researchers and the business press. The research philosophy adopted in the study is positivism characterized by the testing of hypothesis developed from existing theory through measurement of observable social realities. The study adopted descriptive research design as the overall strategy to be used to integrate the components of the study in a coherent and logical way. The target population for the study included the monthly means of the 54 (fifty-four) tea firms and a census was adopted since the population was small and the study used secondary average monthly data for the period 2008 to 2012. There was a significant positive relationship between the foreign exchange rate and total monthly export volume (r = 0.247, P-value =0.050) and this implied that exchange rate influenced the amount of exported tea. A non-significant negative relationship was established between firm's monthly tea export and foreign income (r =-0.054, P-value =0.683). A similar significant positive relationship trend was observed between coffee prices and firm's monthly tea export (r = 0.500, P-value of 0.000). The coefficient of determination (R2) indicates that about 54.3% of change in firm's monthly tea export was accounted for by the explanatory variables while the adjusted R-square of 49.2% further justifies this effect. The results of this study indicate that exchange rate volatility is one of the variables that influence performance of tea exports from Kenya to the main tea importers from Kenya. An increase in the shilling exchange rate volatility leads to a more than proportionate decrease in demand for tea exports volumes from Kenya to the main. five importers. Increased exchange rate volatility increases uncertainty about future exchange rate behavior. This implies that tea exporters in Kenya are risk averse and with an increase in exchange rate volatility exporters reduce their exports in order to reduce their risk exposure. These results are explained by the fact that Kenya's tea exports compete with the local market, as Hence in conditions of high exchange rate volatility which causes uncertainties regarding exporters' profits, their option is to reduce production or sell to the domestic market. There is interdependence between exchange rate stability, macroeconomic stability, institutional reforms and export performance and hence policy makers need to consider the existence, degree and likely effects of exchange rate volatility while designing, developing and implementing trade policies The government needs to make key commitments to maintain the stability and competitiveness of the exchange rate as part of its export promotion and diversification strategy and apply appropriate policy management tools to this task. Trade policy should be geared towards overall macroeconomic stability supported by a competitive exchange rate as well as structural reforms that contribute to increased productivity and the enhancement of international competitiveness. Tea export promotion strategies like subsidies and tax concessions need to be promoted. There is need for a stabilization policy aimed at mitigating high exchange rate volatility to promote tea exports in Kenya. The government needs to seek ways of reducing volatility of the exchange rate. To avoid exchange rate risk in the short term, firms would require hedging of their currency exposures.