Shoppers at a supermarket. The Kenya shilling is most properly valued against the dollar among major currencies in Africa based on ability to buy goods, a new study says. PHOTO | FILE
What you need to know:
The Kenya shilling is most properly valued against the dollar among major currencies in Africa based on ability to buy goods, a new study says.
Pan-African market intelligence firm Sagaci Research used the purchasing power of 18 African currencies based on the price of a 12-piece chicken bucket at fast-food chain KFC restaurants, which are present in these countries.
Kenya’s six KFC outlets price their chicken bucket at an average of $20.60, less than one per cent above the US price of $20.50. This, according to the study, means that the shilling is overvalued by only one per cent in real terms.
The Kenya shilling is most properly valued against the dollar among major currencies in Africa based on ability to buy goods, a new study says.
Pan-African market intelligence firm Sagaci Research used the purchasing power of 18 African currencies based on the price of a 12-piece chicken bucket at fast-food chain KFC restaurants, which are present in these countries.
The average costs of the same product vary widely from country to country, indicating a disparity in real and implied currency exchange rates, the study said.
Kenya’s six KFC outlets price their chicken bucket at an average of $20.60, less than one per cent above the US price of $20.50. This, according to the study, means that the shilling is overvalued by only one per cent in real terms.
Last year, the shilling depreciated by 12.8 per cent to the dollar, but still outperformed many African currencies that booked higher levels of depreciation over the period. This year the shilling has appreciated marginally against the greenback by 0.5 per cent to exchange at 101.78 units.
“The index illustrates the cost of purchasing final products by consumers in Africa, home to a rapidly growing middle class. It enables companies and individuals to draw comparisons between African countries, as well as other developed markets such as the US and Europe, and hence assist them in calibrating pricing strategies during their entry into the African market,” said Sondos Faramawy, research director at Sagaci.
Elsewhere, the highest prices of KFC chicken in comparison to US based prices are found in Angola and Nigeria (at $35.20 and $30.10), thus leading to an estimation that their currencies are overvalued by 72 per cent and 47 per cent respectively.
On the other hand, the lowest prices are found in Egypt and South Africa, whose currencies are undervalued by 34 and 48 per cent respectively. The semi-annual study, done on February 15, is similar to the one carried out by UK publication The Economist, which tests purchasing-power parity (PPP) by comparing the prices of a McDonalds hamburger (called the Big Mac Index) in different countries with the US price.
Nominal exchange rate
This is under the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services in any two countries.
Economists have in the past pointed out that the shilling is overvalued in real terms even as the nominal exchange rate points to a depreciation in value.
In their recent briefing on the economic outlook for 2016, CfC Stanbic analysts noted that the interventions seen from the regulator when the currency started strengthening following its slide to the 106 level last year are indicative of concern over an overvaluation on trade-weighted basis.
“The regulator may not admit it, but they are watching the trade-weighted exchange rate. After going from 106 to 101, the Central Bank of Kenya started buying dollars from the market. They may not want the currency appreciating too much on trade-weighted basis,” said CfC Stanbic economist Jibran Qureishi during the report presentation last month.
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