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