The Kenya shilling is arguably the strongest currency among the East Africa Community (EAC) member states, giving the region’s economic power house a competitive edge over her peers in international trade.
However, the country has been operating a managed shilling than a free float currency, running a risk of making its exports more expensive in the short run as compared to competitors, eventually causing a reduction in export earnings and the economy’s growth, a report by Amana Capital has established.
Amana’s “Kenya’s Economic Puzzle – Putting the pieces together” report highlighted that 10 years ago, the Consumer Price Index (CPI) stood at 97 but has since shot up to 192 to date, meaning what the value Ksh100 (USD0.99) could buy in January 2009 can only buy 50 per cent of that now.
This translates into a 50 per cent devaluation of the purchasing power. Nonetheless, of interesting concern, is the shilling’s exchange rate which was at 72 in January 2009 and currently stands at 99.
This represents only 20 per cent devaluation of the currency in the 10 year period, meaning the Kenya shilling is over valued by 30 per cent on a purchasing power parity basis, according to Amana capital.
To support the above, the investment firm argues that if according to the CPI Ksh100 in 2009 can only buy goods worth Ksh50(USD0.49) in 2019, then according to the exchange rate the same amount should afford goods worth Ksh80(USD0.79) in 2019.
Hence, this is a worrying mismatch also not supported by the balance of payments method of valuing a currency as there is only Ksh500 billion (USD4.9 billion) in export earnings versus Ksh2.5 trillion (USD24.6 billion )in import expenditure and Ksh2.7 trillion (US 26.6 billion )in foreign debt, even if you add investment flows and the questionable diaspora remittance figures.
During the launch of the report in Nairobi recently, Amana Capital Chief Investment Officer Reginald Kadzutu, stressed that the report aims at providing an in-depth analysis of the facts and figures for the country’s economy focusing on six key elements namely; debt, balance of trade, employment, fiscal policy, currency and interest rates in a holistic manner.
“How these six elements blend together and the potential threats they present should not be underestimated as they impact the overall outlook of the economy,” Kadzutu said.
The report argues that the country’s debt which stood at Ksh5.2 trillion (USD51.3 billion) as of December 2018 has changed from being a productive debt to unproductive as it is not adding to the productive capacity of the economy.
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It adds that this will create a net burden resulting towards a sharp increase in taxation. In a span of five years, the debt structure has also changed with domestic debt standing at 54% and external at 46% in 2013 and 48% and 52% respectively in 2018.
Notably in 2018, for every Ksh100 of tax collected, Ksh25 went to paying interest on debt and as at June 2018, for every Ksh100 in revenue, Ksh34 was used to service total debt obligations.
Giving an analysis on the balance of trade, the report notes trade deficit has grown by 26% from 2013 to 2018 and it will not change direction in the near future based on the weak export structure and a weather dependent agricultural sector.
As a result, pressure will persist on the Kenya shilling as imports will continue to grow, importation of grains will increase with the drought forecast and the slow death of the sugar sector will also put an increase demand on raw sugar imports.
The main export tea has been dropping in price and coffee’s demand has also been on a downward trend.
In addition, the report says the main tool for directing the economy is the fiscal policy delivered through the annual budget but unfortunately the country has “a lame and confused” fiscal policy that does not actually provide impetus to the drivers of the economy.
“The two main tools of the fiscus namely taxation and spending have also been out of balance as the spending is increased at the same time with taxes which is counterproductive to stimulating the economy,” the report notes.
Budget deficit based purely on revenue versus expenditure is an average of 34 per cent.
“The continued 34 per cent overspending and the underperforming of revenue collections will lead to future taxation increases to pay the debt used to plugging the funding gap,” Amana notes.
Finally, the restrictive interest rate regime has reduced banks’ lending activity as they cannot balance the risk return trade off. Insights from the report further revealed that this has starved the private sector of the required level of credit growth to make an impact on economic growth.
It states that with private sector credit growing at four per cent against the required 12 per cent, the economic activity, tax revenue and employment will all reduce, and debt will grow more and more.
“From our analysis, the six elements are likely to lead to; reduced revenue growth, reduced employment growth, reduced export earnings, increased debt servicing commitments, increased external wealth transfer and deflating asset prices. In the long run, we foresee a drastic drop in the Kenya shilling which will be the spark that will implode the economic system,” said Reginald.
“However, Kenya’s economy can still re-emerge from these threats if the
Government cushions it by employing policy measures such as: balancing the budget gradually; reducing costs and moving to contract-based employment; diversifying the pool of products that generate export revenue; and controlling devaluation of the shilling to its true market value,” he concluded.
Amana Capital Limited has been licensed and regulated by the Capital Markets Authority (CMA) as a Fund Manager since 2003 and by the Retirement Benefits Authority (RBA) since 2004.
The company manages money on behalf of individuals, families and corporate organizations. All the assets under management are kept under a safe custody arrangement by a custodian bank licenced as such by the CMA.
In this way, in the unlikely event that Amana Capital was to go out of business, all the client assets are safe. There is absolutely no co-mingling of the company’s own funds with the funds managed.