dc.description.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. |
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