Impact of exchange rate volatility on coffee export in Kenya

Abstract

Ninety-five percent of Kenyan coffee is exported as green coffee in the international market in Europe. As a spot market, this presents a problem in that the currency of the foreign market differs from that of the domestic country (Kenya), resulting in an exchange rate problem. Kenya has a floating exchange rate system, which means that the country’s exchange rate is decided by the forces of demand and supply for domestic currency. This means that there is a comovement of domestic currencies against other global currencies; in this case, the currencies of Kenya’s key coffee market. Therefore, this study examines the influence of currency volatility on Kenyan coffee exports. According to recent figures from the Central Bank of Kenya, Kenya’s real exchange rate fluctuated from 2001 to 2020 and the country recorded a negative trend in coffee exports during the same period. This begs the question of whether real exchange rate volatility had an impact on coffee exports during this period. Data was sourced from the Coffee Directorate, the International Coffee Exchange, and the Central Bank of Kenya and was analyzed using the gravity model. The exchange rate volatility was estimated using Purée and Steinherr’s model. The findings show that exchange rate volatility hurts Kenyan coffee exports. Similar results were obtained through robustness checks by quantile regression. Consequently, this study advises that monetary and fiscal policy measures should be tailored to reduce exchange rate volatility, while still promoting agricultural exports and overall macroeconomic stability.

Impact statement

One of the most contentious issues in international trade today is the impact of exchange rate volatility on imports and exports. Thus, it is important to understand how Kenya’s coffee exports are impacted by changes in exchange rates. For example, there are studies that report positive or negative effects, but there is a dearth of research on coffee exports from Sub-Saharan Africa, particularly from Kenya. The study’s conclusions suggest that Kenyan coffee exports are negatively impacted by fluctuations in exchange rates. This finding may be helpful in reevaluating macroeconomic strategies to boost agricultural exports in nations with economies that are comparable to Kenya’s.

Keywords:

• Coffee export
• exchange rate volatility
• gravity model
• real exchange rate
• Kenya

REVIEWING EDITOR:

• Goodness Aye, University of Agriculture, Makurdi Benue State, Nigeria

SUBJECTS:

• Economics
• Finance
• Economics and Development

JEL:

• O11

Author contributions

Richard W. Wanzala: conception and design; analysis and interpretation of the data; the drafting of the paper; Nyankomo Marwa: revising the manuscript critically for intellectual content; and the final approval of the version to be published; Lwanga E. Nanziri: revising the manuscript critically for intellectual content.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

The data is available at the Mendeley data platform using either doi or URL below: Mendeley Data: doi: 10.17632/wkypp73j7z.1; Data URL: https://data.mendeley.com/datasets/wkypp73j7z/1.

Additional information

Funding

This study was funded by Stellenbosch University and SENTINEL (Social and Environmental Trade-offs in African Agriculture) under the umbrella of the Regional Universities Forum for Capacity Building in Agriculture (RUFORUM).

Notes on contributors

Richard Wamalwa Wanzala

Richard Wamalwa Wanzala is a Postdoctoral Fellow at University of Johannesburg in South Africa. He holds a PhD in Development Finance of Stellenbosch University in South Africa and PhD in Finance from JKUAT) in Kenya. Currently, he is a Lecturer at JKUAT where he teaches Finance and Risk Management and Operation Research. His research interest is development finance, financial economics and agricultural risk management. He has also experience in development finance sector having worked as a Research Fellow at Tanzania Agricultural Development Bank in Tanzania.

Nyankomo Marwa

Nyankomo Marwa is an Associate Professor Digital Transformation, Development Finance and Applied Econometrics at Johannesburg Business School (JBS). Prior to JBS, Prof Marwa was the head of Postgraduate Diploma in Development Finance at the University of Stellenbosch Business School. Prof. Marwa has held different positions in the past including a Director for Policy Research and Planning at Tanzania Agricultural Development Bank; Siemen International and MITACS scholar in consumer behavior modelling at Dr. J. Herbert Smith Center of Technology Management & Entrepreneurship, University of New Brunswick, Canada; Biostatistician at Saskatchewan Population Health Research Unit in Canada; Forensic Scientist and Supervisor of Forensic Bureau at Tanzanian Forensic Bureau and Country Research Analyst in Social sector at TWAWEZA. He earned his PhD in Development Finance from the University of Stellenbosch Business School. He attended his Doctoral Course Work in Economics, Econometrics and Public Policy from the University of Nebraska Lincoln (USA) and Johnson Shoyama Graduate School of Public Policy, Canada. In addition, he holds Masters’ degree in Agricultural Economics from University of Nebraska Lincoln (USA), Masters’ degree in Applied Statistics and Biostatics from Hasselt University (Belgium) and BSc. Agricultural Economics and Agribusiness from Sokoine University of Agriculture (Tanzania).

Elizabeth Nanziri Lwanga

Elizabeth Nanziri joined University of Stellenbosch Business School as a Senior Lecturer from the University of Oxford which she was admitted in 2016 as a Post-Doctoral Newton International Fellow. She is also an inaugural World Bank-AERC Visiting Scholar, hosted by the World Bank’s Office of the Chief Economist, Africa Region in Washington, DC, USA. She holds a PhD in Economics from the University of Cape Town and a Master of Arts degree in Economic Policy and Planning from Makerere University. She is a Development Economist and her research focuses on financial sector development, financial inclusion for firms and households, remittances, agricultural policy and finance in Africa. Previously, Elizabeth served as the CEO of the South African Savings Institute, coordinating financial sector policy, practitioners, research houses and civil society on savings in South Africa. She is also the Director of the Association for the Advancement of African Women Economists (AAAWE) in South Africa.