Foreign Capital Inflows and the Real Exchange Rate in Kenya

Despite Kenya's efforts to attract foreign capital inflows, the country has faced challenges sustaining the inflow of foreign investments and continued surge in real exchange rate. The purpose of this empirical paper is to highlight the impact of foreign capital inflows (foreign direct investment, foreign portfolio investment and foreign remittances) on the exchange rate in Kenya from 1992 to 2022 as a sample, with a particular focus on disaggregated foreign capital inflows. The study time series methodology improves on previous research on this topic by engaging Autoregressive distributed lag (ARDL) approach that can be used to examine the short-run and long-run dynamic interactions of the variables simultaneously and is more robust for small sample size of data. The research results reveal a robust and negative association between foreign capital inflows and exchange rate in Kenya. The results show that in general, foreign capital inflows does strengthen real exchange rate. At the disaggregated level, the results show that foreign direct investment, portfolio investment and remittances are associated with exchange rate appreciation in Kenya. Therefore, government and policymakers should enhance policies geared at attracting foreign capital inflows to preserve the value of the domestic currency.