capitalism

Targets Kenya must aim for in Agoa renewal

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This article first appeared in my weekly column with the Business Daily on June 14, 2015

The African Growth and Opportunity Act (Agoa) is set to expire this September. Agoa provides about 6,500 African products with a preferential quota and duty-free access to the United States market. Over the past 13 years, Agoa has been important to Kenya and Africa because unlike economic partnership agreements, the Act is non-reciprocal and unilateral – preferences apply only to African imports entering the US and not US exports into African countries.Basically, African products are allowed to enter the US with limited tariffs which makes them more marketable.

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(source: https://ustr.gov/sites/default/files/AGOA-Feature_1.jpg)

Kenya has already benefited from Agoa through textiles, spices, coffee, tea, fruits and nuts exports. The textile and apparel industry has reaped significant benefits through Agoa and contributes 85 per cent of the jobs created in the export processing zones (EPZ).

Over the Agoa period, the Institute of Economic Affairs says, the value of our exports to the US increased from $109 million (Sh10.5 billion) to $433 million (Sh42 billion) per annum. Part of that can be attributed to Agoa.Luckily for Kenya, the Obama administration seems keen on renewal. However, it is clear that the partnership will be reviewed. Already there are signals from Washington that the US is getting anxious about its economic position globally. It is in the process of negotiating the Trans-Atlantic Trade and Investment Partnership (TTIP) with the EU which will give EU products top preferential access to US markets.

The US has good reason to grant such access to the EU because the pact will be reciprocal. The negotiation of such a partnership gives clear signals that the US is looking out for itself and Kenya should watch out. Secondly, as Kenya becomes a stronger economy, the baby-sitting treatment Africa has traditionally received aimed at rectifying trade imbalances will happen less. Over the past few years Kenya and Africa have been saying, “Stop giving us aid, we’ve grown up; we’re ready for investment, trade and being treated as equals.” Kenya ought to realise that the US is listening and this new ethos of equal partnership, not preferential access, may inform Agoa’s renewal. Already, there are plans to amend Agoa to put pressure on South Africa to open its market to American poultry producers and Kenya can expect similar changes.

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(source: http://i.huffpost.com/gen/822621/images/o-ALAN-HUDSON-CHICKEN-FARMER-facebook.jpg)

So what should Kenya aim for in the renewal of Agoa? The first is to push for the maintenance of preferential access with limited or no expectation of reciprocity. This case will be harder to make now than it was 13 years ago, but the government ought to make the case that Kenya should continue qualifying for unreciprocated access.

Secondly, we should push for value addition. In the case of textiles and apparel, for example, Kenya should make the case for adding value to the skins and hides before export. This will add value to textile exports, deliver greater financial returns and support economic growth more strongly.

Thirdly, expand Kenya’s export profile. The Brookings Institute suggests that we should set up a task force to identify products for which the country has a comparative advantage in producing, and then export these through Agoa. South Africa has diversified its exports to include agricultural products, chemicals, minerals, machineries and energy-related products. Kenya can learn from its experience.

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(source:http://dressedandstripped.nl/wp-content/uploads/2015/06/20150612-DAILYSTAR.jpg)

Finally, high transport costs to the US are a non-tariff barrier translating into weak price competitiveness of our products. We need to negotiate a bilateral agreement for air freight transportation via direct flights into the US.

Were is a development economist. Twitter: @anzetse, email: anzetsew@gmail.com

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Low oil prices are good, but let us watch the dollar

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This article first appeared in my weekly column with the Business Daily on January 25, 2015

Oil prices have fallen by more than half from the mid-2014 peak. Most look at this as a positive development for Kenya, but they are missing an important point; there is a link between low oil prices and a strong US dollar.

Analysts have long observed the correlation between low crude prices and a strong dollar.

Why does this happen? The answer is unclear. But one explanation is that when there is plenty of global liquidity and returns from traditional financial assets are low, large amounts of money are shifted to commodity markets and the oil market in particular, thus oil prices go up.

In the inverse case, when the prospect of returns from traditional financial assets is elevated, money is shifted out of commodity markets such as oil, leading to a decline in price.

The US is on the mend as will be discussed below, and this raises prospects of good returns from traditional financial assets and this may be a factor that explains how a strong dollar puts downward pressure on oil prices.

(source: http://blog.independent.org/wp-content/uploads/2013/03/EconomicRecoverySign.jpg)

The inverse relationship between crude prices and the dollar will have an impact on the Kenyan economy, but which will carry the day?

According to an analyst interviewed by Reuters, the negative effect of the stronger dollar on global liquidity outweighs the positives from falling oil prices by a ratio of 10 to 1.

Let’s look at the effect lower oil prices can have on Kenya’s economy. Inflation should fall and so should the Current Account Deficit (CAD).

Additionally, lower oil prices are associated with stock surges in the country and portfolio investors targeting Africa are now focusing more on oil-importing countries such as Kenya and looking away from oil-exporting countries.

(source: http://businessdayghana.com/wp-content/uploads/2014/09/Black-oil-barrels-with-mark-on-white-background.jpg)

But Kenyans should also look at the other side of the equation; a strong dollar.

Behind the rise of the dollar are important related factors. Firstly, the US economy is recovering with positive growth prospects while forecasts for other developed economies in particular are being revised down.

The US GDP (annualised) grew 4.6 per cent in Q2 and 3.5 in Q3 while there are concerns about deflation in Europe for example.

There is also a reported improvement in the US current account deficit and some argue that more tension between and Ukraine and Russia could not only further dampen growth in Europe, but this uncertainty could make the Euro even more unattractive for investors pushing them to US dollars.

Kenya faces numerous problems if the trend of the strong dollar continues. To begin with the strong dollar is rising in the context of a weakening Kenya shilling due to low demand for shilling-backed investments (bad for stocks and local debt issues).

Additionally, some imports will become more expensive for Kenya, which is an import economy, thereby placing upward inflationary pressure on the economy (which may counter the deflationary power of low oil prices).

On top the strong dollar will strain the CBK’s capacity to continue injecting dollars into the economy without running down its own foreign exchange reserves.

(source: http://www.interaksyon.com/assets/images/articles/interphoto_1312540688.jpg)

Finally, Kenya’s dollar denominated debt will be more expensive to service and paying back a strong currency in a weak one is a sombre combination.

Thus although low oil prices are a welcome development, the association with a strong dollar has an ominous undertone for the economy of which Kenyans should be aware.