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ECONOMY
Kenya sails into calmer economic seas
John Oluoch
Published: 03-APR-06

Resumption of foreign aid, improving balance of payments and bigger numbers of tourists are bringing signs of recovery to Kenya�s economy. The turnaround follows a period of near stagnation after cuts in foreign donor aid over endemic corruption in the government.

According to Dr Andrew Mullei, governor of the Central Bank of Kenya (CBK), the country is showing increased cash inflows from tourism, and is being buoyed by foreign currency reserves that reached $1,6bn in 2005, against $1,3bn the previous year. This helped maintain low inflation, safeguard investments and boost customer confidence.

A downside in the steady growth in the country�s foreign reserves, boosted in large measure by the resumption of foreign donor support, was the strengthening of the local currency beyond levels manufacturers and exporters were comfortable with. The shilling gained 3 percent against the US dollar and 5 percent against the euro, yen and sterling in last year�s third quarter. (See below: Call to correct the shilling)

Foreign debt, however, is a further constraint impeding more rapid growth.

�The country is paying for more than it is getting because of its high foreign debt component,� says Evans Osano, a Senior Investment Manager with AIG Global Investment East Africa. �This tends to have a negative impact on the exchange rates and the strength of the shilling,�

AIG, a firm specialising in asset management, equity and fixed income funds, believes Kenya has managed to beef up her foreign currency reserves despite the challenges of high cost of imports exceeding the export value.

�The current account deficit is widening because we are importing more than we export. Kenya imports basic commodities and raw materials, which account for 40 percent of all imports,� says Osano.

�The developments in the current accounts have led to a larger deficit of $930mn. Although this points to a weaker shilling, this has been mitigated by positive developments in the capital and financial accounts,� he explains.

CBK reports that the current account deteriorated with imports up by 41 percent, rising faster than exports, increasing by 22 percent. Oil imports rose 26 percent, accounting for 22 percent of all imports. Kenya recorded a balance of payment surplus of $212mn in 2005.

The East African region�s story of economic recovery extends to both Uganda and Tanzania, despite their currencies feeling the heat of the vibrant global economy, particularly the strengthening US dollar. Foreign holdings by the Bank of Uganda and the Bank of Tanzania is slightly higher than what the CBK has in stock.

Uganda�s foreign exchange reserves declined slightly from $1,622bn in September 2005, to $1,657bn in June 2005 due mainly to a lower performance in coffee exports.

Tanzania has also recorded a marginal decline in its foreign exchange reserves, which fell from $2,296bn in December 2004 to $1,906bn at the end of the 2005 financial year.

�The foreign currency inflows in Uganda have been low while the demand for the shilling has been high. The oil import bill has gone up while the Ugandan shilling has depreciated,� says George Apaka, an assistant Investment Manager at AIG. �The Ugandan shilling is expected to remain stable as the prime coffee revenue is expected towards the end of 2005. We have seen less and less intervention of the Bank of Uganda to stabilise the shilling.�

Tanzania�s economy was buffeted somewhat by drought and the resilient global economy, bringing upward inflationary pressures. The Tanzanian shilling was squeezed in the last quarter of 2005 as increased seasonal demand for forex to finance food imports, coupled with the strengthening of the dollar in the international market, took their toll.

�Positive economic developments on the global economy have made an impact on the Tanzanian shilling which has lost ground, while the Ugandan shilling weakened 7 percent to the dollar due to a drag in exports,� says Apaka.

Meanwhile, the political uncertainty in Uganda, the Presidential and parliamentary elections in Tanzania and the just constitutional referendum in Kenya, analysts say, made the East African region a volatile investment destination during the last quarter of 2005.

�The March 2006 elections in Uganda could hurt the economy. There is uncertainty but the sentiments may change depending on how donors view President Yoweri Museveni�s bid for a third term, you remember they cut aid some time early this year,� Apaka says.

Kenya, the dominant economy in the region, suffered in the early 1990s, as a result of the multimillion-dollar Goldenberg scandal in which the country lost $100mn. But it has since re-established its billing as the largest economy in the region as its foreign currency reserves grew.

�It is satisfying to see the robust performance of the economy. Our monetary policy is to support growth. This is due to the impressive performance of our monetary policy. The challenge is to sustain the momentum which has been created,� says the CBK Governor. �We will ensure inflation is not allowed to eat into the wealth of Kenyans.�

Uganda is Kenya�s single largest export destination, accounting for 12,6 percent of Kenyan exports, followed by the United Kingdom, which takes in 12,5 percent. These are above the 9,4 percent or $2,589bn worth of Kenyan goods exported to America. Tanzania accounts for 4,2 percent of all exports from Kenya.

Call to correct the shilling
Earlier this year, the manufacturing industry, exporters and the trade ministry called for a devaluation of the shilling as the strongly rebounding currency ate into Kenya�s export revenues. Trade minister, Mukhisa Kituyi, said the shilling was overvalued and should be corrected to save those sections of the economy from collapse.
���The shilling, at a three-year high, has dampened traditional enthusiasm for Kenya�s tea and coffee products, manufactured goods and stemmed the flow of tourists. In addition, �one third of flower and horticultural exporters are struggling, and the textile industry has had to cut its margins�, says Kituyi. Kenyan exporters want the central bank to intervene and force the currency down to a range of 76-78 to the dollar from its damaging 71 high in mid-February.

This special report was first published in Business in Africa Magazine (East Africa), March 2006. To subscribe click here



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