Irony of a weak shilling and declining export earnings


Cargo containers at the port. FILE PHOTO | NMG

Kenya’s shrinking export earnings in defiance of a weakening currency have exposed underlying weaknesses and loss of competitiveness in the economy, threatening the country’s ability to create jobs.

Trade data released by the Central Bank of Kenya (CBK) last week shows that the country’s income from exports fell by two percent to $7.29 billion (Sh1.12 trillion) in the 12 months to October 2023.

The weakening of the shilling by 19.4 percent in that period would ideally have resulted in higher export earnings, experts say, especially from regional economies that constitute the biggest market for Kenyan goods and whose currencies have also gained on the shilling.

A weakening shilling ought to result in an increase in export earnings due to exchange gains when inward payments are made, while also making Kenyan goods more competitive.

The fall in earnings, therefore, indicates a decline in volumes, implying lower productivity in the economy.

“We have seen a real adjustment of the shilling this year, where it has weakened by nearly 20 percent. That should point towards at least some competitiveness, but if you look at the current account the deficit has been narrowing, not because exports have increased, but rather due to import compression,” said Churchill Ogutu, an economist at IC Asset Managers (Mauritius).

“It speaks to a broader need for the government to come up with measures to address that gap in competitiveness, rather than just relying on monetary policy to pick up the load.”

Speaking last week, CBK governor Kamau Thugge identified a prolonged erosion of Kenya’s competitiveness against and compared to Uganda and Tanzania as a problem for the economy and the currency.

He noted that Kenya’s ratio of exports of goods to GDP has consistently declined from 12.5 percent in 2011 to 6.5 percent today. 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.

In the 12 months to October, earnings from manufactured goods exports fell by 12.9 percent to $605 million (Sh92.8 billion), while clothing and apparel exports dropped by 18.6 percent to $329 million (Sh50.4 billion).

Export earnings from animals and vegetable oils fell 26.3 percent to $164 million (Sh25.1 billion), while inflows from coffee sales dropped by 16.1 percent to $279 million (Sh42.8 billion).

On the import side, the country’s expenditure dropped by 14.9 percent to $16.65 billion (Sh2.55 trillion) in the 12-months to October, mainly on lower purchases of intermediate and capital goods.

“The only category seeing an increase is food and live animals at 22 percent, driven primarily by the imports in cereals where the government had offered incentives to contain cost of living by zero-rating specific items,” said Dr Thugge.

Courtesy of the lower import bill, the CBK expects the country’s current account deficit to fall to 4.1 percent of GDP by the end of this year from 5.1 percent in 2022.

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