Diaspora Remittances and Dutch Disease in Kenya

Abstract

Diaspora remittances to Kenya have seen a sharp and sustained rise over years, increasing from under $383 million in 2004 to over $890 million in 2011. This has not gone without leaving its macroeconomic impacts. According to Central Bank of Kenya, these remittances have led to higher savings and investments and consumption. Remittances however, can lead to the appreciation of a country's real exchange rate and hurt its competitiveness, a phenomenon known as Dutch disease. The overvalued real exchange rate makes the country's exports relatively expensive, imports cheaper and thus puts pressure on the country's current account. This study examined the relationship between Diaspora remittances and real effective exchange rate in Kenya and established the impacts of real effective exchange rate changes on net exports in Kenya. The study used secondary time series data that was obtained from Central Bank of Kenya, Kenya Bureau of Statistics, the IFS and the World Bank. Regression analysis was carried out using vector error correction (VECM) approach to examme the relationship between Diaspora remittances and real effective exchange rate and then applied VAR to find the impact of REER on net exports