EFFECT OF SELECTED MACROECONOMIC DETERMINANTS ON AGRICULTURAL EXPORT PERFORMANCE IN KENYA

Abstract

Agricultural exports are key drivers of the Kenyan Economy. They contribute significantly to foreign exchange earnings, job creation, and economic growth. Kenya’s Vision 2030 highlighted agriculture as a crucial economic pillar that will spur its achievement. However, there has been reduced profitability and an increased uncertainty of producing for export leading to poor performance of Kenya’s agricultural exports. Even though there are a lot of studies on Kenya's agricultural industry, very few of these studies specifically address the country's agricultural exports. This study looked at the effect of capital formation, inflation, and currency exchange rates on the performance of agricultural exports. The general objective examined the effect of macroeconomic determinants on the performance of agricultural exports in Kenya. The study’s distinctive goals entailed: determining the effect of capital formation on the performance of agricultural exports in Kenya, establishing the effect of inflation on the performance of agricultural exports in Kenya, and investigating the effect of the currency exchange rate on the performance of agricultural exports in Kenya. This research was anchored on traditional trade theory. It used a causal research design to examine the relationship between variables, using annual secondary time series data from the World Bank. Data analysis was done using EVIEWS software version 10 for descriptive statistics, correlational, and multiple regression analysis. The results of a Correlation analysis revealed positive correlations between the agricultural export performance and capital formation (0.6631), and the Currency exchange rate (0.7853), but a negative relation for the case of inflation (-0.2959). ADF test revealed integrated levels at I(0) and I(1), and the F-Bounds tests showed the absence of a long-term relationship among variables. The outcome of a multiple regression analysis revealed that capital formation and currency exchange rate had significant positive effects on agricultural export performance while, inflation had a negative significant effect, with coefficients of 0.4848, 0.3983, and -0.2817, in that order at a 5% significance level. The data was normally distributed, the independent variables were not correlated, and the regression residuals were homoscedastic and not serially autocorrelated according to the post-estimation diagnostic tests. Drawing from the empirical findings, the study recommends implementing robust inflation management policies to stabilize prices and lessen the adverse effects of inflation on agricultural exports. Additionally, the government should introduce policies to ensure a competitive exchange rate. The study further suggests that additional research be conducted to assess the impact of macroeconomic factors, including Gross Domestic Product, Foreign Direct Investments, and Unemployment, on the performance of Kenya's agricultural exports.