Profiling Kenya’s Exchange-Rate Misalignment and Its Co-movement with EU Export and Import Flow

Abstract

Despite Kenya’s export-oriented strategies, its trade balance remains import-driven, resulting in a persistent deficit that mirrors the depreciation of the Kenyan shilling. This study examined Kenya’s exchange-rate misalignment and its relationship with trade flows with the European Union (EU) from 2015 to 2024. Using secondary data and a descriptive–correlational design, analysis was based on Purchasing Power Parity (PPP) and misalignment theory. Results show that the Real Exchange Rate (RER) remained consistently undervalued relative to the euro, while Kenya’s trade deficit with the EU persisted, reflecting structural import dependence despite export growth. Correlation analysis revealed a significant negative association between exchange-rate misalignment and exports (r = –0.692, p < 0.05), but no significant link with imports or the trade balance. These findings indicate that shilling undervaluation supports export growth but has limited effect on imports and the deficit. The study concludes that exchange-rate policy should be complemented by industrial and trade diversification to address structural drivers of import dependence and strengthen Kenya’s external balance.

Keywords: Bilateral Trade; Competitiveness; Purchasing Power Parity; Real Exchange Rate

DOI: 10.7176/JESD/16-6-05

Publication date:September 30th 2025