Forex

My thoughts on Brexit- TV Interview

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Yesterday I shared my initial thoughts on Brexit and the implications for Africa and Kenya.

My thoughts on the Kenya 2016 Economic Survey and interview panel on the same

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This article first appeared in my weekly column with the Business Daily on May 8, 2016

The Kenya National Bureau of Statistics (KNBS) released the Economic Survey 2016 which provided interesting insights on the state of the Kenyan economy. GDP growth stood at 5.6 per cent in 2015 compared to a 5.3 per cent growth in 2014. An important development indicator to note in Kenya however is that GDP per capita (a measure of average income per person in a country) has not moved very much marginally increasing to KES 91,588 in 2015 from KES 89,240.5 in 2014. This is because although the economy is growing, so is the population. Such robust population growth in which almost a million births were recorded last year, translates to a dilution of the ability of economic growth to significantly reduce poverty levels.

Inflation stood at an average of 6.6 percent, within the CBK preferred range of 5 percent +/- 2.5 percent. It appears that monetary policy action by the CBK which consisted of several actions such as increasing the Central Bank Rate (CBR) from 8.5 per cent to 10.0 per cent in June 2015, and further to 11.5 per cent in July 2015, managed inflation.  Interestingly however, despite the CBK interest rate hikes and a general feeling that credit is expensive in Kenya, domestic credit grew by 19.2 per cent and credit to the private sector expanded by 17.5 per cent in the 2015. Back to monetary policy, this was particularly important last year which saw the KES dip in value to the USD. This depreciation was due to internal and external factors and probably negatively informed growth as Kenya is an import economy and such depreciation created upward inflationary pressure. However the lower cost of Kenya’s biggest import, petroleum, ameliorated the inflation dynamic as oil prices fell to USD 52.53 per barrel, down from an average of USD 99.45 per barrel in 2014, which allowed government to spend KES 215 billion in 2015, down from KES 293 billion in 2014.

(source: http://www.familiesforsurvival.org/wp/wp-content/uploads/2011/10/kenya-pic-money.jpg)

Agriculture continued to be the strongest contributor to GDP at 30 percent followed by manufacturing at 10.3 percent. An important note about agriculture is that the report states the weather system El Nino as a positive contributor to agriculture leading good rains and an improvement in agriculture outputs. However a point of concern is that tea production fell by 10.3 percent and coffee by 16 percent, both of which are important exports and forex earners. Although both still earned a bit more than they did in 2014, it is important that any further deterioration in the performance of these commodities is stemmed. This is because of the continued poor performance in the tourism sector, another important forex earner, where tourism earnings fell 2.9 percent from KES 87.1 billion in 2014 to KES 84.6 billion in 2015. In short, the figures seem to indicate that forex revenue generation was difficult last year. Poor performance by forex earners has numerous fiscal implications such as negatively informing government’s ability to service foreign denominated debt affordably.

In terms of manufacturing, growth remained fairly constant growing a fraction from 10 percent in 2014 to 10.3 percent in 2015. This marginal increase is attributed to reduced cost of inputs such as petroleum products and electricity. However, on-going constraints such as the high cost of credit and cheap imports continue to negatively affect the sector.

Job creation grew by 5.6 percent and an on-going trend was confirmed in that the vast majority of jobs were created in the informal sector. Informal sector employment rose by 6.0 per cent to 12.6 million persons, with a share of 82.8 per cent of total persons engaged in employment. Clearly the informal sector continues to grow and be an important job creator for Kenyans. This should provide impetus for efforts to be directed at this sector to make it more productive in a manner that alleviates poverty.

(source: http://www.businessdailyafrica.com/image/view/-/2765356/medRes/770595/-/maxw/600/-/s8sitd/-/jua+kali.jpg)

Overall, efforts need to continue to increase productivity and outputs in agriculture and manufacturing (particularly the latter), the poor performance of forex earners ought to be analysed and addressed, and the informal sector has to feature front and centre in terms of efforts to improve the performance of private sector.

Below is an interview panel in which I participated on Citizen TV last week commenting on the Economic Survey 2016:

Anzetse Were is a development economist; email: anzetsew@gmail.com

 

Interest rates present a tricky challenge for the CBK

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


After the government announced that it had acquired a two-year, Sh77.43 billion ($750 million) syndicated loan, some banks raised their interest rates. This raised questions about what happened to the billions raised via the Eurobond and the implications of rate hikes on the economy. However, the truth of the matter is that there are several compounding variables with which CBK has to contend; variables that put pressure to keep rates high as well as pressure to lower rates.

In terms of the pressure to keep rates high one need only remember that the CBK raised the Central Bank Rate (CBR) to 10.0 percent in June 2015 from 8.50 percent and then raised it again to 11.5 percent in July 2015. These hikes were done in an attempt to stem the depreciation of the shilling and control upward inflationary pressure. This act was arguably warranted given that Kenya is an import economy and has to service foreign denominated debt which currently stands at about 50% of total debt. Therefore, if the KES depreciation is not managed, import bills will become more costly and foreign denominated more expensive to service. These are real short to medium term pressures that the government has to manage.

(source: http://i.telegraph.co.uk/multimedia/archive/01811/inflation_1811026c.jpg)

Of course the problem with raising interest rates is that it often has a dampening effect on economic growth due to reduced investments and consumption. Therefore in keeping rates high further strain will be put on economic production and GDP growth. This will happen in the context of economic performance that has been so anemic that both the World Bank and the government revised GDP growth figures downwards. High interest rates will likely exacerbate the subpar performance of the economy and government will fail to generate the revenue required to pay import bills and service debt. Therefore in this scenario, CBK has to tussle with keeping rates high to stem KES depreciation and control inflation while contending with the negative consequences of doing so.

At the same time, there is pressure to lower rates. As mentioned, high interest rates tend to dampen economic growth and Kenya cannot afford this. So there is good reason for rates to be lowered, clearly the economy needs it. Lower rates will enable economic productivity, support economic growth and allow government to generate much needed revenue. However, if interest rates are lowered it risks prompting the devaluation of the shilling and enabling upward inflationary pressure. A weak shilling will mean import bills are more expensive and may make servicing foreign debt unaffordable. High inflation will raise the cost of living which will mean that basic goods such as food become more expensive for Kenyans. This is when the politics of economics comes in; no government wants to be in power when basic goods become unaffordable as social unrest usually ensues. Therefore, although there is pressure to lower interest rates, the potential negative consequences of doing so are not phenomena with which any government would want to contend.

(source: http://blog.amnestyusa.org/wp-content/uploads/2013/03/163414855.jpg)

In short, there are dangers in keeping rates high and dangers in lowering rates; so what should the CBK do? In my view, given the fact that there is extra incentive to raise rates due to heavy domestic borrowing by government, the CBK should lower rates. This is because government borrowing has prompted rate hikes beyond what CBK had orchestrated. Therefore, a lowering of the CBR will buffer the economy and Kenyans from the recent hike in rates.

However, the situation the economy is in right now has made one thing clear; Kenya’s economy cannot continue to be structured as it is. There must be concerted and deliberate action by government to plan a fundamental reorientation of the economy in which more forex is earned. This can be done through increasing exports and diversifying our export profile, as well as supporting forex earners such as tourism.

Anzetse Were is a development economist; email: anzetsew@gmail.com

CBK in a tight spot with monetary policy options

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This article first appeared in my weekly column with the Business Daily on September 13, 2015

It is no secret that the Kenya shilling has been tanking, nearing 106 to the US dollar last week. Bear in mind that this is not the lowest the shilling has ever reached; KES reach USD 107 in October 2011. However, conditions now are different and have informed the anxiety about the depreciation of the shilling. Not only does Kenya’s Current Account Deficit remain substantial, the country is racking up foreign denominated debt. As of March 2015, Kenya’s public debt stood at KES 2.5 trn, about KES1.3 trillion (52%) from domestic sources, with the remainder of KES1.2 trillion in foreign borrowing (48%). Yet total public debt is expected to go up to 2.9trn by end year. How much of this will be foreign denominated? This question becomes important when analysing the KES value issue as it adds to the problem of a scarcity of dollars.

https://i0.wp.com/www.theodoresworld.net/pics/1111/dollarImage2.jpg

(source: http://www.theodoresworld.net/pics/1111/dollarImage2.jpg)

The factors that are causing KES depreciation are numerous and include high liquidity in the market after the government released payments to state-linked entities and ministries, a strengthening of the US dollar, Kenya’s high current account deficit which has led to a scarcity of dollars, high imports, and poor tourism inflows the last of which is an important forex earner. Finally, foreign investors have been exiting the Nairobi Securities Exchange taking dollars along with them. So what can and what has the CBK been doing to address these pressures on the shilling?

Well firstly is the direct sale of foreign exchange. However, such a strategy is constrained by two factors. Firstly, Kenya is an import economy, thus by definition, forex is scarce. Yes, the government currently has Foreign Exchange reserves of about $6.4 billion as well as a precautionary facility from the IMF, but these options are limited. Not only must dollars be drained from the economy to make trade payments, lower exports and the poor performance of tourism add a further burden on the CBK’s ability to throw dollars at the depreciation problem. Further, high dollar denominated debt means that the government has to start saving dollars in order to make the repayments that are maturing on this type of debt.

(source: http://www.businessdailyafrica.com/image/view/-/2762546/medRes/836831/-/maxw/600/-/srcvs8/-/Shilling.jpg)

Secondly, the CBK can address the depreciation problem by fiddling with interest rates; and it has. CBK raised the Central Bank Rate (CBR) to 10.0 percent in June 2015 from 8.50 percent, which had been stable since May 2013. CBK then again raised CBR from 10% to 11.5% in July 2015. But there are several problems with raising interest rates to influence the performance of the shilling. Firstly, it often has the effect of slowing economic growth due to reduced investments and consumption. The conundrum here is that the performance of the Kenyan economy will be negatively affected by a hike on interest rates; yet the Treasury’s rosy growth projection of up to seven per cent this year was based on interest rates remaining stable at around the May 2013 levels. Remember that the Kenyan economy is already performing at the subpar level of 4.9% GDP growth in first quarter. Yet interest rates hikes make the prospects of the rates of future GDP growth even grimmer. However high GDP growth performance was based on lower interest rates, the very same lower interest rates government had hoped to rely on to generate the type of economic growth to generate funds that can be used to accumulate revenue as well as build up forex reserves. Thus the irony is that the interest rate increases CBK is using to try and control KES depreciation may constrain GDP growth and thus the government’s ability to accumulate the funds needed to give it wiggle room in controlling interest rates in the future. Difficult conundrum indeed.

(source: http://starrfmonline.com/kitnes/data/2014/12/01/1.1913127.jpg)

Finally, the CBK can reduce the amount of shillings in circulation to control KES depreciation. Indeed, the CBK has sought to drain excess liquidity from the market by offering Sh6 billion in repurchase agreements. But again the CBK is constrained, mainly by political considerations. It is well known that Kenya has a very high recurrent public expenditure bill and thus the government is in a situation where more KES are regularly being released into the market than had been the case for previous administrations, pushing KES liquidity in the market up at regular intervals. But there is no way, as of now, that that public expenditure bill will be reduced; such steps would be too politically acrimonious. Add to this the fact that Kenyan teachers just secured a pay increase. That hike, if calculated up to 2017, will be Sh99.8 billion incurred on teachers’ pay alone. It is also likely that payments to police and other civil servants will rise; thus the public recurrent expenditure is on the rise. Sadly, government’s options in creating the funds to make such payments possible will, again, affect government’s ability to control the depreciation of the KES. How can government pay an ever increasing public expenditure? One by raising taxes which reduce investment and consumption and reduce GDP growth, or additional borrowing by government in domestic markets which crowds out private sector, or foreign borrowing which adds to the problem of additional foreign denominated debt. Thus here, again, CBK’s impact in lowering KES circulation via draining excess liquidity is limited given all these political considerations. Indeed in addressing all these wage demands, government again will be put in the difficult position of very high liquidity in local markets, coupled with taking actions that may dampen GDP growth while also potentially accruing more foreign denominated debt. Again, a difficult conundrum indeed.

Given all these factors, it is clear that the CBK is in a very tight position with regard to the monetary policy options at its disposal to control the depreciation of the shilling. It will be interesting to see the action CBK takes in coming months in addressing what is truly a difficult problem.

Anzetse Were is a development economist; email: anzetsew@gmail.com