Forecast: Kenya’s exports to drop five per cent in the next two years

Kenya’s exports are projected to decline by 5.1 per cent in the next two years, weighed down by the high cost of doing business in the country and projected sluggish growth.

This is despite efforts by the country to boost its export market to increase its foreign exchange earnings and improve its balance of trade.

According to a Parliamentary Budget Office (PBO) report released last week, although exports are expected to grow by 7 per cent this financial year and by 7.1 per cent in 2015/16, they are expected to fall by 5.1 per cent in 2016/17despite steady growth in the financial years 2014/15 and 2015/16 due to several challenges that will deal a severe blow to the country’s ability to create jobs and earn foreign exchange.

“The projected decline is attributed to the increased cost of doing business relative to competitors, declining contribution of the manufacturing sector to GDP, lower-than-expected tourist arrivals, slow growth in productivity in the private and agriculture sectors, and declining competitiveness of exports,” the report said of the economy.

The PBO pointed out that the uncertainties surrounding renewal of the African Growth and Opportunity Act (Agoa) between Kenya and the United States and the fate of the Economic Partnership Agreement (EPA) with European Union will have a negative impact on Kenya’s export market in the next two years.

The US and EU are among key destinations of Kenya’s agricultural commodities and textiles, and continued uncertainty over treaties with trade partners may see some products attract punitive tariffs or be locked out of markets altogether.

On the flip side, imports of goods and services are projected to grow by 5.2 per cent, 5.9 per cent and 7.3 per cent in the financial years 2014/15, 2015/16 and 2016/17 respectively.

This is attributable to rising imports of machinery and equipment for planned infrastructural projects and local manufacturing.

Kenya is a net importer and depends largely on sectors like tourism, tea, coffee and horticulture for foreign exchange earnings to enable the country meet its import bill and to stabilise the local currency.

Petroleum products are the biggest item on the import bill and have, over time, put pressure on the country’s foreign currency reserves.

In the year ending June 2014, the import bill stood at $17 billion (Sh1.5 trillion) compared to $6 billion (Sh524 billion) worth of exports in the same period.

EXTERNAL MARKET SHOCKS

Tea, tourism and horticulture, the country’s major foreign exchange earners, are facing challenges that may significantly affect earnings.

The price of tea, Kenya’s largest forex earner, has been very low while tourism has been beset by insecurity and travel warnings by top tourist markets.

The rising import bill, as a result of external market shocks saw the Kenyan shilling hit a three-year low against the US dollar towards the end of last week before recovering following intervention by the Central Bank of Kenya.

CBK said last week the country’s import cover had improved to 4.85 months following the accumulation of foreign exchange reserves arising from the Eurobond proceeds.

The reserves, which have accumulated over the last three weeks, largely accrued from the sovereign bond issued by government in June, have risen from Sh550 billion ($6.3 billion), representing 4.13 months of import cover at the end of August this year, to a high of Sh645 billion ($7.4 billion).

“The current level of foreign exchange reserves is not only adequate to meet unforeseen market developments, but also confirms that inflows into the foreign exchange market have continued to improve,” the CBK said.

ECONOMY VULNERABLE

But analysts say that given the challenges affecting tourism and agriculture, the economy is vulnerable to macro-economic shocks if the trend of declining forex earnings continues.

“Inflows from tourism, tea and coffee have been on the decline. If there is a compromise on those sectors, we don’t expect the CBK to do much,” Mr Benard Omenda, head of treasury at Equatorial Commercial Bank, said.

Adequate foreign currency reserves are vital in stabilising foreign exchange and providing the country with a buffer zone against macro-economic instability likely to arise from increased imports against exports.

Already, Kenya’s exports to her trading partners in East Africa have been on a decline since 2012 as a number of local manufacturing firms have set up in those countries.

The manufacturing sector in countries like Uganda has registered significant growth in the last decade, reducing overreliance on products from Kenya and other countries with a comparatively strong industrial base.