Imports glut hurts local production, weakens shilling

I recall the US dollar selling at about seven Kenya shillings in 1970. Today, the shilling’s parity against the dollar is slowly creeping into the mid-90s.

This raises fear that unless factors devaluing our currency are addressed, the exchange rate could soon reach the psychological level of Sh100. This would trigger inflation in an economy heavily dependent on imports.

There is a limit as to how much foreign exchange the Central Bank can pump into the money markets to prop up the currency. The longer term sustainability of the shilling’s value lies in how much wealth the country continuously creates to maintain a strong currency. And a wealthy nation must of necessity produce more than it consumes, and export more value than it imports. Currently, this may not be the case with Kenya.

The economic data released last week confirms that imports continue to exceed exports resulting in a balance of trade deficit. The dollar-generating sectors (tourism, agriculture and manufacturing) slowed down in the past year. This was happening as the country required more foreign exchange to finance essential imports for the ongoing infrastructure development.

However it is the unrestricted imports of consumer goods that is of major concern. Some of these consumer items can be produced in Kenya, while others can be classified as discretionary luxuries. Other imports are either smuggled in or are counterfeits.

Kenya is a free market economy mostly devoid of trade controls and interventions. But this may be a lopsided and unsustainable trade model under the current circumstances.

We need to honestly ask ourselves why this model has not succeeded in developing critical local production capacity and jobs. Do we need to selectively institute some painful restrictions and fiscal penalties to reduce over-reliance on imports while supporting increased local production capacity?

Recently Prime Minister Modi of India launched the “Make in India” campaign to transform the country into a global manufacturing hub by making high standard goods for exports and local consumption. His numerous trips abroad have encouraged foreign firms to manufacture in India.

By making in India, the country hopes to create more local jobs and benefit from foreign technology transfer while building national wealth. I am sure Modi will launch new policy instruments to make this a reality.

High pitched national slogans and campaigns have the power to create and sustain awareness, focus and commitment. The “Buy Kenyan Build Kenya” slogan in the 1970s worked remarkably well. Industrial areas developed in all major towns to manufacture goods and reduce imports. Many jobs were created.

Foreign manufacturers were assisted to set up camp in Kenya. And all this was possible because we had effective anchor policies to initiate, nurture and protect local industrialisation. This lasted until the trade liberalisation policies of 1990s were introduced. Unfortunately, these were implemented wholesale without transitional provisions.

Local manufacturing weakened as Kenya essentially became an importing nation. Collapsed factories were converted into import warehouses and mostly remain so to this day. Subsequently, the agricultural sub-sectors (cotton, pyrethrum, sisal, wool, leather and dairy farming, among others) that fed some of these industries collapsed.

Many high value jobs gradually evaporated, and many Kenyans disappeared into the diaspora. We have remained an importing nation because it has become very easy to import. Further, it has become difficult for our manufacturers to compete fairly with Asian factories which have the benefit of lower costs driven chiefly by critical mass and economies of scale.

In Kenya, agriculture and manufacturing play shared economic roles. Successful agriculture generates exports, feeds local manufacturing and processing, reduces unnecessary food imports, and above all creates many jobs.

To move agriculture a level higher, we need to institute effective marketing and value adding systems; introduce modern technologies; expand irrigation infrastructure and ensure availability of affordable credit.

Yes we are doing quite well in the development of support infrastructure and services sectors. But these should not be an end in themselves. Infrastructure and services should be pillars that are strategically aligned to support the productive sectors (agriculture, manufacturing etc) to generate more foreign exchange while increasing national wealth and sustainable employment.

The energy sector is finally looking like it will deliver lower energy costs to drive competitive manufacturing. Ongoing upgrade of transport infrastructure provides essential connectivity for production, marketing and exports.

Enhanced ICT now provides invaluable medium for marketing and technology transmission. The education sector has recently initiated a framework to upgrade technical and vocational skills.

What we now require are enabling transitional policies to permit competitive production to thrive. And some of these policies may initially need to go against the grain of free market principles. When trade corrections are achieved and sufficient productive capacity established at the right costs, then we can revert to unimpeded free market and globalisation.

Exchange rate stability is a key indicator of how well our economy is doing. Our economic planners should institute policies to expand exports generation and accelerate imports substitution. This way Kenya shall grow foreign exchange reserves, buttress the value of the Kenya shilling, and check inflation.

Mr Wachira is a director Petroleum Focus Consultants
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