Ideas & Debate

Cut down imports, maximise exports to build forex reserves

dollars

A bank employee counts one hundred dollar notes at a bank. It is the national economic planners who should be telling us how and when we shall sustainably stabilise our foreign exchange reserves. The planners may need to come up with a “foreign exchange generation” blueprint that matches forex requirements for funding Vision 2030. Photo/REUTERS

We have listened to monetary and fiscal experts, bankers and even politicians and the common theme running through the exchange rate discourse is that the country is consuming more dollars than it can support with its dollar inflows, a situation which may not be sustainable medium to long-term.

This is happening as the country is funding imports of materials for major infrastructure projects; facing high global oil prices; and experiencing food deficits.

It is the national economic planners who should be telling us how and when we shall sustainably stabilise our foreign exchange reserves. The planners may need to come up with a “foreign exchange generation” blueprint that matches forex requirements for funding Vision 2030.

Without sufficient forex cover, it may prove difficult to finance capital requirements and technologies for Vision 2030.
A middle income society as forecast by Vision 2030 will essentially have a high appetite for imported consumer goods which call for strong forex reserves.

A country can aspire to become an economic Tiger only if it achieves a sustainable surplus balance of payments.

Economic planners I am sure can dust the files from the 1960/70s when economic master planners of the time (Mboya and Kibaki) produced consistent policies that prepared the country to grow its forex reserves by increasing exports and reducing non-critical and discretionary imports.

Slogans like “Buy Kenyan, Build Kenya” became the rallying calls that consistently and persistently guided industrial, commercial, financial and agricultural policies.

As the politicians were recently busy engaging the banks and the central bank, they may have missed two critical bits of ongoing happenings – Oil prices were rapidly going up, while food security organs were advising of imminent need for food imports.

These two facts alone could see a return of more vicious volatility of the exchange rate in the future. There is a limit as to how often the country can rely on IMF for balance of payment support.

The ever increasing oil import bill is worrying as it heads towards 30 per cent of total national imports bill, a position we last saw in early 1980s during the Iranian oil crisis.

The price of Murban crude oil which we import averaged about US$ 79 per barrel in 2010 and increased by 39 per cent to average at US$ 110 in 2011.

Last month alone Murban price increased by 5 per cent from US$ 114 to US$ 120 between January/February 2012. March 2012 is expected to experience higher prices.

What is perplexing is that as oil prices increased, Kenya continued to consume more oil which increased by 12 per cent from 4.05 to 4.57 million cubic metres between 2010 and 2011 according to figures published by Petroleum Institute of East Africa.

There is nothing sinister about increased oil consumption, as long as such demands fuel the GDP growth, which in turn would directly or indirectly generate value added foreign exchange.

Diesel consumption increased by 10 per cent and this may have gone into the massive infrastructure projects, thermal power generation, and general transportation, all of which are GDP drivers.

Jet fuel increased by 19 per cent and this went to support increased international travel and tourism which are dollar generators.

However, it is the 13 per cent increase in gasoline (petrol) consumption that is worrying because this is normally attributed to passenger cars whose use is mostly discretionary and not always directly supporting dollar generation.

It is in the use of gasoline that we should focus on if we are serious about reducing the oil import bill.

The gasoline consumption predicament reminds me of the drastic fiscal measures taken by the government in 1980/81. Before 1980 petroleum taxes on all products were equal. In 1980, the Treasury skewed taxes and loaded most of them on gasoline, and kept diesel and kerosene lower.

This spread persists to this day.

The government went further and actually banned import of passengers cars (this persisted until about 1985) to reduce petrol demand while conserving forex on car imports.

Whatever oil we import we have to use efficiently. Projects and programmes associated with improved public transportation (city railways, 24 seat buses, rapid transit buses), reduction of traffic hold-ups, goods haulage by railways instead of roads, all address transportation efficiency which in turn reduces fuel wastage, reduces dollar imports (and also reduces carbon emissions).

Accelerated investments in alternative power generation (geothermal, wind, Kitui coal...not imported coal) will also greatly address reduced imported oil for electricity generation.

The government economic and fiscal planners may have little option but to start taking early decisions (which may be politically unpleasant) to discourage non-productive discretionary imports in general while increasing exports and dollar remittances across all economic sectors.

On food security and imports, weather unpredictability seems to be a major variable that should not be taken lightly.

It is becoming increasingly difficult to plan agricultural and livestock production.

It should be appreciated that the positive impacts of ongoing irrigation efforts will take time to evolve into mass food production. Until this happens, dollars will need to be routinely budgeted for food imports.

We shall by now have realised the critical part played by the Diaspora Kenyan in keeping handsome amounts of dollars flowing in.

We should take this “Diaspora sector” seriously by proactively coming up with incentives and policies that grow dollar inflows.

Wachira is the director, Petroleum Focus Consultants . [email protected]