Shilling’s 36pc rise against dollar stunts export sector growth

The Kenya shilling has in real terms appreciated 36 per cent against the dollar in the past 13 years, posing a major threat to exports while making imported goods cheaper.

According to experts, this amounts to three per cent revaluation yearly, a factor that partly explains why the difference between exports and imports has been rising to the point that the current account deficit is now about 10 per cent of the total annual output (GDP).

In 2012, the value of total exports stood at Sh517.8 billion while that of imports was at a massive Sh1.374 trillion, opening a huge gap that is plugged through volatile foreign capital and financial flows.

“The real exchange rate has appreciated by 36 per cent between year 2000 and 2013. This is close to three per cent per year,” said John Randa, a senior economist at the World Bank office in Nairobi.

Mr Randa spoke Tuesday at a seminar held at the Kenya School of Monetary Studies (KSMS), where several academic and policy-related papers were presented on the relationship between the exchange rate and monetary policy.

The foreign cash inflows financing the current account may be coming into Kenya as foreign direct investment or for speculation, Mr Randa said, noting that Kenya was good in attracting foreign exchange due to political and economic stability as well as high returns on financial assets.

“Some of the foreign cash may be suspicious, but it is useful all the same. There is economic and political stability in Kenya compared to its neighbours. Returns on bonds and equities are good, even though the market is actually quite thin with very few dominant players,” said Mr Randa.

While noting that the exchange rate serves as a shock absorber in the economy, Mr Randa said its movements could be sustained by artificial reasons rather than fundamentals.

“The Central Bank should look at the policy consequences of short-term capital flows. I wouldn’t agree with the thesis that it should do nothing on the exchange rate. The market once never cared what the CBR was, but now it does,” said Mr Randa.

A paper authored by KSMS researchers Moses Kiptui, Joseph Wambua and Lydia Ndirangu, showed that the real exchange rate (RER) has significant effect on exports in the long run, though it fell short of recommending that Kenya should move towards depreciating the RER.

“The results have shown that the real exchange rate has significant long-run effects on exports, policy wise, it has been shown in this paper that the exchange rate is important tool that policy makers need to pay attention to,” said the paper that was presented at thee forum.

“It is important that the exchange rate is not overvalued to ensure the competitiveness of exports .”

Dr Kiptui however, said depreciating the RER may not be the solution to growth in exports.

CBK governor Njuguna Ndung’u said there should not be unwarranted concern about the effect of the current account deficit because imports were contributing to pushing economic growth.

“You should look at the payback on the investments being made such as under Vision 2030. You cannot expect payback immediately, as it could come after 10 or 20 or even 30 years,” said Prof Ndung’u in an interview on the sidelines of the seminar.

CBK has for long had to fight critics, including politicians who laid the blame for currency depreciation on its door steps instead of pushing for repairing the supply side (production) of the national economy.