Impact of exchange rate volatility on coffee export in Kenya

Abstract

AbstractNinety-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.