Effect of Foreign Exchange Rate on Financial Performance of Listed Manufacturing Companies in Kenya

Abstract

<p>The government of Kenya’s broad target for enhancing manufacturing is to increase the manufacturing share of gross domestic product from 8.4% to 15% to create more jobs but the target remains a mirage owing to the poor performance of the manufacturing sector over the years where for instance, sector performance declined to 3.5% in 2019 compared to 4.4% in 2018. Studies globally, regionally and locally have been conducted to establish how macroeconomic variables affect the profitability of companies. However, mixed results have been reported pointing to positive, negative, significant and insignificant effects making it unknown how economic growth, inflation and exchange rates influence the performance of manufacturing firms. The purpose of this study was to establish the influence of Interest rates on the financial performance of listed manufacturing companies in Kenya. The study was guided by; the efficient market hypothesis and arbitrage pricing theory. This study adopted a descriptive correlational research design grounded on panel data spanning 6 years from 2015 to 2020 with a target of 8 listed manufacturing firms. The exchange rate showed a negative influence on performance with coefficients 0.358, 2.764 and -1.532 respectively such that a 1% increase in economic growth and inflation increased performance by 0.358% and 2.764% respectively while a 1% increase in exchange rate decreased performance by 1.532%. The study recommends the formulation of prudent macroeconomic policies including bailouts during pandemics geared towards enhancing the performance of manufacturing firms as envisaged under the Big four agenda and Vision 2030 blueprint.</p><p> </p><p><strong>JEL</strong>: L60; O24; F31</p>

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