Weak shilling pushes up tea earnings despite low harvest

Higher prices and a weaker shilling are likely to deliver a repeat of last year’s record earnings for the tea industry, offsetting the negative effects of adverse weather that has slashed production of the beverage.

Statistics from the weekly regional auction in Mombasa showed that in the year-to-date, the average price of Kenyan tea sold was 10.2 per cent higher than the cumulative $2.73 per kilogramme (kg) fetched last year, signalling a likely repeat of the good performance.

The country fetched Sh97 billion from a bumper crop of 399 million kg in 2010, surpassing horticulture as the largest source of foreign exchange. Horticultural exports earned the country Sh78 billion in 2010.

Traders said prices have been boosted by a scramble for the offers available amid lower supply as a result of the prolonged drought that has ravaged most production areas.

“The volumes have been slightly lower, but that has been compensated by stronger prices,” John Mwangi, a dealer said.

During the first half of the year, the volume of Kenya tea sold through the auction stood at 128.8 million kg, 16 per cent lower than during the same period last year, statistics showed.

Data by the Tea Board of Kenya (TBK) shows the country’s production for the first half of the year fell 16 per cent year-on-year due to hot and dry weather and poorly distributed rainfall in tea growing areas, sending exports lower.

Output of the commodity dropped to 178.4 million kg compared with a similar period of 2010, with the east of the Rift Valley more affected than other growing areas. The effects of this thinned output reflected on the export side where shipments fell to 211.7 million kg from 216.9 kg.

“Lower production was largely attributed to hot and dry weather conditions experienced during the first quarter of the year as well as depressed and poorly distributed rainfall pattern experienced in most tea growing areas during the second quarter,” Sicily Kariuki, managing of TBK said late last month.

Traders said a stronger dollar against the local currency is likely to boost the country’s overall forex earnings from tea this year.
The shilling has taken a beating against the dollar, reaching a historic high on the effects of drought that has seen traders scrambling for the dollar to enable them import essential items such as food and heavy fuels to run thermal power generators.

Some analysts, including Central Bank of Kenya (CBK) governor, Prof Njuguna Ndung’u, however, warned that the weaker shilling may pose mixed effects in country should the situation persist.

“The importers are complaining about the exchange rate,” Prof Ndung’u told Bloomberg on Friday.

“The exporters are so happy.”
CBK has taken up a raft of measures to try and tame the falling shilling including increasing its key lending rate twice this year to head off inflation generated by rising global oil prices and food costs.

The bank’s Monetary Policy Committee (MPC), however, left the benchmark rate unchanged at its last meeting in July, saying that further rate increases would do little to tame supply-side pressures.

Apart from the interventions on the benchmark rate, CBK has also pondered options with varying the lending rate to commercial banks in a bid to tighten liquidity and stabilise the performance of shilling against the dollar.

CBK has indicated that commercial banks planning to borrow from the overnight window would be charged at a higher rate based on a formula based on the central bank rate (CBR), plus the previous day’s average inter-bank rate, minus the central bank’s rate of 6.25 per cent plus a penalty of three percentage points.

The discount window rate has since been rising and hit 17.89 per cent as of Thursday, from 6.25 per cent before the rules were changed.

Prof Ndung’u was quoted by Reuters on Thursday as having said he was satisfied the bank’s tightening of monetary policy through the revised discount window rate rule.