Now Kshs gains against the dollar; should we sit pretty?

In my last article, “Juju Is Innocent, Here's How To Save The Kenya Shilling”, I examined at some length the issues affecting that currency. I broadly classified them as demand for the dollar (what we seek to buy with the dollar), and supply (what we sell out of the country in order to earn the dollar). Hopefully most us agreed that it is this balance that ultimately determines the value of the shilling relative to the dollar; the less we do not need the dollar, the stronger will be the shilling and vice versa.

It is therefore important that Kenyans focus on activities that either earn us more dollars (exports), or reduce the need for dollars (import substitution). Let me start with import substitution.

There are things we import that we cannot do without. Oil, aeroplanes, most vehicles, and so forth, are all things that we must import at the prices ruling on international markets. However, if you go to our supermarkets today, there are loads of foods imported from all sorts of places - including oranges and beans.

Since next to them you will find local oranges, I would propose that we create a luxury tax that discourages importation of things like foreign oranges. This means that Kenyans will be free to buy and use these products, yes, but at a big price.

The effect of this will be to significantly reduce their consumption and, along with it, the dollar demand to buy those products. At the same time it will raise the demand of local products and hence boost employment. The list of such products is long. It includes but not limited to imported tea, powdered milk, rice, packed juices, kitchen utensils, pesticides, dog food, cooking, oil, beer, etc. These kinds of items should attract at least 100 per cent duty. This tax could even extend to luxury cars.

Net exporter

In agriculture, we must get so good that we shall import NOTHING from outside the country. We have both the land and the expertise to do this. We need to create an agricultural policy that encourages large-scale farming and that offers the infrastructure to exploit the semi arid areas. We must do it in such a way that in every category, we become a net exporter of food. This is important because being a country without minerals and blessed though with good weather on the Equator, we should exploit this to the full to both save ourselves spending dollars importing food, and instead gain some (as a net food exporter). This should be a goal we can achieve by 2015.

There are many raw materials that our various industries need to turn into finished goods. I would argue that we need to remove taxes on all those to encourage local manufacture.

However, I would raise taxes on finished imported products to encourage local value add in order to reduce need for foreign exchange while creating jobs for Kenyans. For example, fabrics to make clothes can be zero rated for tax, but finished clothes can be disproportionately taxed to encourage entrepreneurs to invest in value addition locally.

The game is about removing some jobs from places like China and bringing them to Kenya, and therefore using fewer dollars.

We should even charge taxes on foreign education to the extent that one goes for courses that are available in Kenya and in good quality; e.g. Bachelor of Commerce, Accounting, or BA in Geography for instance.

On the export side, we should take a hard look at creating incentives to export. South Africa does it for some of its strategic industries, but we do not. There are many tax rebates that we can offer to people exporting, including tax holidays in some categories just to gain competitiveness and loyal usership for our products abroad.

Our biggest exports on the agriculture side are tea, coffee and horticulture. We need to create a PPP (public private partnership) where the government deliberately contributes to creating industries that help to create a Kenyan-finished brand; that goes straight from Kenya to the supermarkets abroad instead of to factories that then make the finished product in some other countries. A good example: the Yellow Tea label, made out of UK, is exclusively from Kenya and Ceylon tea. They will even sometimes disclose that in the packet. Why then, don’t we do a Kenyan brand completely packaged here, earn more dollars per kilo and create employment? The government contribution could be by way of a differentiated tax regime, or helping with first class infrastructure to make those industries competitive.

Location, location, location

Another key resource we should use is our strategic location. Uganda, South Sudan, Ethiopia, Rwanda and Burundi all can depend 100 per cent on our ports for their exports and imports.

Today we are not serving these countries, and some of them are trying to shake Tanzania into developing their ports. We must create 100 per cent efficiency in Mombasa port as we aggressively build the Lamu port to serve Ethiopia and DR Congo. All that means dollars flowing to our country in terms or rail and road use fees, port charges and storage.

It’s one of the lifelines for Singapore, and there is no reason it cannot be for Kenya. We have talked about this as a country but now that we can see how reliant we are on the dollar. We should really fast track this and, in fact, use these issues to determine what kind of leadership we usher into office in 2012.

To make ourselves export competitively or even substitute our current imports, we must ensure that we urgently invest in more energy. There is no reason why we should even go for a minute without power today.

There is no reason why power should cost us US 13 cents per unit compared to Egypt, a desert, where it costs just US 3 cents. We have huge potential in thermal energy in the Rift Valley hot springs whose exploitation will not only assure energy for today, but the next 10 years as we can get up to 6,000 mega watts (current consumption is about 1,200 MW).

Why don’t we close our eyes and just produce it; get the government to write off the capital expenditure so the industry gets charged for use only, and bring down the unit cost? This will make our products more competitive even against those from fellow East African Community countries, not to mention exports further afield.

Tourism is a big one and can sort our dollar issues a lot more than it’s doing today. First, as a country, since we have such nice places for tourists to visit, we should focus a lot more on the high-end tourists and charge them a premium.

Secondly, we should ensure accountability of the moneys made via tourism since we know who comes into the country and where they go. We must eliminate tourists who come to Kenya on packages that do not leave the cash in the country. This should be clear right from the licensing procedures of hotels and restaurants. We have a robust system of accounting for VAT everywhere in the country, and see no reason we cannot have a similar system for accounting for dollars.

Al-Shabaab

Finally, we need to sort out security. I support what the government is doing in containing the Al-Shabaab militants in Somalia who were crossing into and disrupting business in the country. However, we must also drive a diplomatic long-term solution. Why is Kenya a favourite target for Al-Shabaab?

Are we perhaps paying for the sins of America, who are seen as our close friends, without at the same time getting their help when push comes to shove? Whatever we do, we must ensure that insecurity is completely eradicated because capital has a habit of flying away when it is threatened by security concerns. Capital flight means, by definition, a demand for dollars to invest elsewhere!

So is the current break the Shilling has got against dollar pressure sustainable? I am willing to bet not, if we do not redouble our efforts in areas where we earn the dollars, as we manage judiciously areas where we spend the dollars. It also so happens that a good drive to earn the dollar by such things as pushing our own brands internationally also has a very positive side effect – it kicks up our national pride and belief in ourselves, which, I dare suggest, we desperately need.