An Evaluation of Effects of Exchange Rate Volatility on Kenya’s French Bean Exports

Abstract

During the period after the adoption of a floating exchange rate regime in Kenya, there has been substantial volatility produced by the regime. In spite of the considerable foreign exchange contribution of Kenya’s French beans subsector to the economy, the effects of exchange rate volatility on it remains unclear. This study evaluated the effects of exchange rate volatility on Kenya’s French bean exports to major markets in the European Union. Monthly secondary data for the period January 1990 to December 2011 were used in the estimation of an export demand model. In measuring exchange rate volatility, this study employed the generalized autoregressive conditional heteroscedasticity (GARCH) model. The empirical results show a negative effect of exchange rate volatility on French bean exports and a stimulation of the exports by a shift in the exchange rate regime from fixed to floating. An increase in the level of income in the importing countries led to a rise in the volume of Kenya’s French bean exports while an increase in the relative price led to a decrease in demand in the European Union. From these results, this study recommended that policy makers need to maintain a robust exchange rate regime that will ensure a non-volatile behaviour. Policy measures should be instituted aimed at mitigating the high exchange rate volatility to promote French bean exports from Kenya. In order to cushion exporters from high exchange rate volatility, the government could set up a export stabilization facility and develop forward market for French bean exports. There is need for policy makers to work towards increasing the volume of exports through diversification of market destinations by targeting local, regional and export markets as opposed to the current practice. This can be realized through regional and export market promotion initiatives as well as consistent compliance with quality standards. Innovative ways of meeting the standards and facilitation of smallholder farmers to meet these standards is required. In addition, French bean export promotion incentives such as input subsidies and tax concessions need to be considered. To limit over-reliance on exporting as a major channel for French beans produce in Kenya, the government and key stakeholders in the industry need to be proactive in promoting utilization of French beans locally through value addition and creating awareness to the local consumers on the nutritive value of the vegetable coupled with research and extension initiatives. To reduce the relative price of French bean exports from Kenya, there is need for structural reforms that contribute to increased productivity and the enhancement of international competitiveness.