High tea, coffee prices offer hope for Kenya’s recovery

A strong rally in commodity prices could help put Kenya’s economy back on the growth path, analysts said even as they warned of persistent risk of imported inflation from the steady surge in the prices of key imports such as oil.

Kenya’s fortunes in the commodities market is particularly tied to the continued strengthening of coffee and tea price that is helping the shilling claw back part of the ground it has ceded to major world currencies in recent months.

That should reduce the country’s external debt burden and bring down the cost of imported intermediate goods that are critical to growth of industrial output.

Analysts are however concerned that the continuing surge in crude oil prices may exert a negative impact on the green shoots of growth as the rise in prices of key food imports such as wheat and rice pile upward pressure on headline inflation.

“Oil prices should be particularly watched because it is a key input into the economy and has exhibited a sticky price structure — quicker to track prices higher and slow to track them lower leaving it with a heavy skew,” said Aly Khan Sachu, an investment advisor who runs Rich Management.

Last week, an IMF mission that visited Nairobi to assess the state of the economy said it expected gradual improvement but warned of persistent risks.

“In the light of the risks facing the economy, macroeconomic management should remain geared towards achieving the inflation objective and promoting fiscal sustainability,” Michel Atingi-Ego, a senior advisor in the African Department of the International Monetary Fund (IMF) said.

The IMF put its best case scenario for Kenya’s growth at 2.7 per cent in 2009 with the possibility of rising to four per cent in 2010.

Expectation of improved performance is pegged on recent reports of recovery in Kenya’s trading partners such as US, Germany and Japan while the caution is hinged on the continued economic contraction in key markets such as UK.

In recent months, the crude oil price has risen steadily to a 13-month high of between $75 and $80 as demand has risen with signals of global economic recovery.

That price is important because oil accounts for 22 per cent of the value of Kenya’s annual imports.

Some analysts have warned that the ongoing economic recovery will pile pressure on the cost of imported goods as demand for freight surges piling pressure on the cost of shipping that dropped nearly to a 20-year low in the wake of global economic recession late last year.

Prices of key food imports such as wheat and rice are also expected to rise steeply in the coming months as consumers claw back part of the purchasing power they lost with the onset of recession adding to the imports bill burden that peaked in the third quarter of last year as commodity prices peaked to 30-year highs and oil rose to an all-time high of $147 per barrel.

Wheat futures for next month’s delivery have been priced at $500 per bushel at the Chicago Board of Trade but the December 2010 deliveries have been priced at about $599 a bushel indicating a 20-per cent rise in just 12 months.

These pricing trends should be particularly critical to Kenya, which is a net importer of wheat and rice – that are only second to maize as the country’s staple foods.