Determinants of Earnings from Tea Export in Kenya: 1980-2011

Abstract

Fluctuation of tea export earnings affects the profitability of firms in the sector and therefore farmers’ earnings (bonus). To this end, there is dire need for stabilizing the earnings to farmers hence need to know the key factors which could be targets for policy and hence the need for this study. The dependent variable was tea export earning while the independent variables were real exchange rate, foreign income and inflation. To enhance accuracy and credibility of this study, control variables used include unit prices of tea, agriculture value added as well as export of goods and services. The specific objectives included exploring the effect of real exchange rate on tea export earnings; the effect of inflation rate, and establishing the effect of foreign income of major trading partners on tea export earnings. Various regression methods are used to test the research hypothesis, including unit root tests, co integration, and error correction model. The long run and short run analysis of these variables is taken to account. Findings ascertain that indeed the model gives a good description of the variables. Foreign income has an indirect relationship with tea export earnings. On the other hand, they are all significant except inflation. There is a direct relationship between tea export earnings and real exchange rate, tea price, export of goods and services, and agriculture value addition. The study recommends tea exporters to hedge against foreign exchange risk through derivative markets. It encourages stakeholders to engage in marketing and value addition. Value addition is a sustainable solution to ensure stability of earnings from tea exports in the country. Finally, strong monetary policies are recommended to enhance price stability and tea export earnings. This is because such policies should curb the problem of extensive volatility of inflation and exchange rates.