CBK boss on why Kenya is losing edge in EAC


Central Bank Governor Kamau Thugge responds to a question during a meeting with the Finance and National Planning Committee led by Kimani Kuria at English Point Marina in Mombasa on November 10, 2023. PHOTO | WACHIRA MWANGI | NMG

The Central Bank of Kenya (CBK) has blamed Kenya’s weakening competitiveness compared to her East African neighbours over the past decade on a lag in foreign direct investment, which has contributed to the free fall of the shilling.

The regulator on Wednesday published comparative data for Kenya, Uganda and Tanzania covering various measures and ratios such as the current account, exports-to-GDP, travel receipts, FDI and debt service, which show that Kenya’s position has deteriorated consistently compared to those of her EAC neighbours.

Kenya has only outperformed Uganda and Tanzania in the growth of diaspora remittances, which have in the past decade risen to become the country’s top source of dollars ahead of agriculture and tourism earnings.

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Uganda and Tanzania have been helped by more stable currencies against the dollar this year, a factor that foreign investors consider when pumping capital into an economy due to the erosion of returns through exchange losses.

This year, the shilling has weakened against the currencies of Uganda and Tanzania by 18 percent and 13.8 percent respectively.

Against the dollar, the shilling has depreciated by 19.5 percent to 153.29 units since January. In the same period, the Uganda shilling is down by 1.7 percent against the dollar, while the Tanzania shilling has depreciated by 7.6 percent against the greenback in the period.

“The point we want to make is that we have been losing competitiveness. Our level of exports to GDP has been declining consistently, we are not getting as much tourism receipts as our neighbouring countries, and our FDI has also declined,” said CBK governor Kamau Thugge on Wednesday.

“At the same time, our debt service has also been increasing and is much higher than our neighbours. The combination of all these factors has led to the weakening of the shilling.”

The CBK governor spoke in a briefing on the Monetary Policy Committee December meeting, in which the regulator raised the Central Bank Rate by 200 basis points to an 11-year high of 12.5 percent after being spooked by the runaway weakening of the shilling.

Dr Thugge has been calling into question the management of the currency by his predecessor Dr Patrick Njoroge, saying the CBK then had used forex reserves to artificially prop up the shilling—contrary to the assertions by the then governor that the regulator was not interfering with the exchange rate movement.

The governor, therefore, used the data on the weaker competitive position compared to the regional peers to back the CBK position that the shilling was artificially propped up when regional currencies were weakening against the dollar between 2020-2022.

He noted that Kenya’s ratio of exports of goods to GDP has consistently declined from 12.5 percent 2011 to the current level of 6.5 percent. Uganda’s ratio in the period has dropped from 11.6 percent to 8.9 percent, while that of Tanzania has moved from 15 percent to 9.4 percent.

The use of these ratios (to GDP) allows for a fair comparison relative to the size of each country’s economy. On nominal terms, Kenya’s volumes would be higher due to its larger economy.

Similarly, on travel receipts as percent of GDP, Kenya’s ratio of 0.8 percent is lower compared to Uganda (1.6 percent) and Tanzania (2.8 percent).

Kenya has also been spending far more than her neighbours in external debt service, which weakens the shilling by draining dollars from the official reserves.

In 2023, Kenya’s external debt service costs as a ratio of GDP stands at three percent, ahead of Uganda (2.3 percent) and Tanzania (1.6 percent).

On investment inflows, Uganda leads the trio on the ratio of FDI to GDP at 3.2 percent, followed by Tanzania at 1.4 percent and Kenya at 0.7 percent.

Kenya’s peak was seen in 2011, when it led in this metric of 4.8 percent, ahead of Uganda’s 4.1 percent and Tanzania’s ratio of 3.6 percent.

On the current account metric, Kenya’s 2022 deficit of 5.1 percent as a percentage of GDP was narrower compared to Uganda (7.9 percent) and Tanzania (7.0 percent), largely helped by record-high diaspora inflows.

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The reliance on proceeds of external debt to fund the deficit is however a problem for Kenya, given the strain that these loans place on the currency.

“The problem is that while their current account deficit is being financed by foreign direct investment, Kenya’s is financed by external loan disbursements,” said Dr Thugge.

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