The macroeconomic determinants of tea exports sector performance in Kenya

Abstract

Exports are crucial in the developing and middle-income countries to reduce disequilibrium in the balance of payments. Kenya needs to increase its annual earnings because it has a large youthful population, with a general growth rate of up to 2.28% recorded in the year 2020 hence many needs such as employment for the high number of the youths. The key objective of the study is to determine the major factors influencing the performance of tea exports sub sector in Kenya, which it is believed, has a major impact on the growth of the economy of the country. Recently the Kenya institute for public policy research and analysis (KIPPRA) report has raised an alarm in the industry as more tea export market segments continue to record a decline. In 2013, Kenya exported 131 tons more than Sri Lanka but earned 0.3 billion US dollars less than Sri Lanka. The Kenya tea development agency (2009) has raised concern that small-scale tea holders’ bonuses would decline following a 21% decrease in the value of the beverage because of decreased prices on the global market. Furthermore, there is need for increased exports especially from tea for the country to cushion itself against high indebtedness to the World Bank and other multilateral lending organizations. The study is focused on tea as it is the country’s major agricultural export. More than three quarters of the population in Kenya reside within the countryside, and Kenya, like most developing countries depend on agricultural production to generate incomes for its citizens. The objectives of the study are to determine the effect of price variations, the real interest rates, incomes from foreign trading partners and the real exchange rate volatility on tea exports performance in Kenya. The study adopted the international trade theories of opportunity cost, Comparative cost, and Modern theory of international trade employing the explanatory research design. The main sources of data were the statistical bulletin of the central bank of Kenya, statistical abstracts of the Kenya national bureau of statistics, East African Tea Trade Association, and the World Bank development indicator publications. Time series data used covered the period of 1985 to 2019. The Johansen co-integration technique was applied to establish the short run and long run behavior of the variables in the study. Co-integration and vector error correction model were used in the study. Augmented Dickey Fuller (ADF) and Phillips Peron unit root tests for stationarity were employed. Results showed that the data had unit root at levels but attained stationarity property after first difference. Cointegration was present and this prompted the use of VEC to test for hypothesis. Foreign income did not affect tea exports over the period under study. Kenyan tea exports adjust towards long run equilibrium path after a shock or partial adjustments caused by uncertainties such as prices, interest rates and volatilities in exchange rate. This implies that strategies that can help tea exporters cope in the short run should be put in place since Kenyan tea exports go back to long run equilibrium after partial adjustments that took at least 1 year and 2 months. Based on these results, the study recommends that policy makers should forecast the possible effect of price volatility on each tea importing country and provide pricing incentives that will encourage tea farmers to produce more at affordable cost. It is also vital for policy makers to consider the existence and degree of exchange rate volatility that causes uncertainties when implementing policies for Kenya’s tea export demand. The central bank of Kenya should influence the interest rate through monetary policy instruments such as regulating foreign reserves and money supply because changes in real interest rates lead to changes in spending on durable goods, which are a component of aggregate expenditures. Influencing interest rates lead to influence in exchange rates, which in turn lead to changes in net exports of tea in Kenya.