Juju is innocent, here's how to save the Kenya shilling

A lot has been written about what is happening to the shilling, ranging from 'juju', to silly things like turf wars in the Grand Coalition government, to arguments about printing more cash and so on.

However, let us look at the issue objectively. A good place to start is the good old economics of demand and supply. If we agree that high demand relative to supply pushes up prices and vice versa, then the question should be what has changed to warrant a huge surge in demand for the dollar and why is the supply not keeping pace?

To understand this, let us look at what activities supply Kenya with dollars, and what is happening in those sectors.

First, agriculture. Here, tea is the biggest foreign exchange earner. Reports from the Kenya Tea Board indicate that although Kenya shillings earnings are up, the kilos sold were down 10 per cent. This means that the absolute dollars earned were lower and farmers only earned more Kenya shillings because of the surge in the conversion rate.

The story is similar for coffee. The key cause of this is of course drought, which we are only just coming out of.

Second, remittances from the Diaspora. Though I do not have the latest statistics, we know that nearly 80 per cent of the remittances come from the USA. This economy is under so much pressure with one of its worst recessions in living memory that it is even threatening the re-election chances of 'our' President, Obama, the man from K’Ogelo.

Several Kenyans living in the US are busy fighting foreclosures on their mortgages while others are simply out of a job. Many are actually opting to come back to Kenya as evidenced by the high number of mid to senior level management applications companies are receiving. It's safe therefore to say that inflows from this sector are also under a lot of pressure.

Third, tourism. The headline for this sector is that arrival numbers are up, which is good news because they bring much needed dollars. However, a closer scrutiny by the Kenya Tourist Board shows that probably owing to the 'softness' of the economies where they are coming from, they too are trading down. More and more tourists are coming here on packages that even the locals cannot get.

I Googled and got a package from Italy, on a chartered plane to Mombasa, seven days in a four star hotel for US$ 700. If we say US$500 dollars went to the flight and airport taxes and local transfers, then the tourist would be staying in a four star hotel in Mombasa for seven days for a total of US$200 dollars....all inclusive....where is that hotel? I need a holiday! The bigger question as well is with these kind of deals, what portion of this money actually flows to Kenya and who is regulating this?

We can go on and on about the supply side, but from the above three examples it’s clear that real dollars cannot be increasing in our coffers. This supply side is also very elastic, meaning that a little shaking of the environment sends the dollars away very fast. Reliance on these kind of supply sources generally makes us more vulnerable to the external environment than other countries dealing with a different set of products.

What are we importing?

Let us now look at the demand side. Why do we as a country seek dollars? In order to import goods and services. The question then is, what are we importing?

(1) Petroleum products - This constitutes one of our bigger bills. The price of oil has been at an all time high for the last one year, and it's threatening to go even higher. Since we do not have substitutes for oil, we pay whatever price is there in the world markets and as I peer through the window it is clear we are not driving any less. The problem is compounded by use of diesel in our industries after drought forced us to ration power. Also, hugely increased construction of roads has led to unprecedented demand for tar, a by-product of petroleum as well. All this, remember, when our sources of dollars is static or decreasing.

(2) Food - This is actually embarrassing but true. Due to our reliance on rain-fed agriculture we have spent a disproportionate amount of dollars importing food. This has included basic foods like maize (despite our having the potential to produce enough to store for a rainy day). This has put a further strain on the dollar. One can only hope we are learning the lessons and we shall invest in mechanising our agriculture to reduce this dollar expenditure to zero. In fact, the goal should be turn food exports to a source rather than application of dollars.

(3) Machinery and Equipment - This has been increasing and it's a good sign that our country is headed in the right direction towards industrialisation. A closer look though shows that secondhand cars is one of the fastest growing lines.

Besides the one-off dollar demand to import the cars, there is the fact that many of these cars are personal vehicles that do not add to production, but instead create even more strain on the dollar because of fuel. It's also a fact that they are prone to break downs and need spare parts often... all of which need to be imported. This puts a further strain on the dollar on an ongoing basis.

The characteristics of the dollar needs on the demand side is that it's almost inelastic. You pay what you are asked to because you have no choice. While oil is a commodity widely available, the OPEC cartel ensures that the supply is inelastic (Whatever happened to the Association of coffee exporting countries?).

One other factor about Kenya that has not dawned on many of us is that the traditional source of dollars from exporting to our neighbours is also under pressure. In the 60s, Kenya became the obvious choice as manufacturing hub for the region. Many consumer goods would be manufactured in Kenya and exported to the rest of East Africa. With the advent of a free trade called Comesa and the fall of apartheid making trade with South Africa fashionable, most of these multinationals have shifted their manufacturing base for the region to either Egypt or SA. Manufactured goods are then exported directly to Uganda and Tanzania and therefore deny Kenya this traditional source of dollars. These companies include GlaxoSmithKline (GSK), Unilever, Cadburys, Colgate, Reckitts among others.

If we are not careful, it's going to get worse because Uganda will soon be exporting oil to us while Tanzania is toying with the idea of building a gas pipeline to Kenya and export the stuff also to us. What will Kenya export to these two countries to keep our balance of payments anywhere close to sensible?

These two countries do not need our tea, coffee or horticulture but they have stuff we badly need. These are the questions we should be seriously asking ourselves. Otherwise, we shall soon be the 'smaller' brother in East Africa. With this scenario, aren't we surprised that the dollar has held steady for this long?

What to do?

In my view, as we move this country forward and push vision 2030, we must have a solid plan to do two things:

(1) Import substitution: This means producing everything that we have a comparative advantage and save the dollar; and

(2) Aggressively export: This has to be an imperative. We must chase those dollars in order to buy what we do not have.

Besides, this will also do one more thing that we are not talking enough about.....generating lots of employment for our youth.

Exactly how do we do this practically? This will be the focus of my follow up post.