Thursday, January 11, 2007


THE SHILING AND MPAC


The shilling has strenghthened over the last year from a sh74 to the US Dollar to Sh69.This has been good news for importers since the cost of imports in Shillings has declined.However,for Exporters income in shillings has decreased.
Here's an example to show how the Shilling affects importers.Assume that X ltd(fictitious company) imports a steel bolt costing US$ 1000(and this price remains constant).The cost of the import when the US$/Ksh exchange rate is sh74 is Ksh74000 i.e.(1000 x 74=74,000)
When the US$/Ksh exchange rate is sh 69. The cost is Ksh 69,000.Thus the change in the exchange rate from US$/Ksh 74 to US$/Ksh 69 leads to a drop in the cost of importing the bolt from Ksh 74000 to Ksh 69000.
The strong shilling has mitigated the high oil prices in the last two months i.e. if the shilling had gone from US$/Ksh exchange rate sh 74 to sh80, a litre of petrol would have been around sh 90.

However, the strong shilling will affect our key foreign exchange earners like agriculture , tourism and even manufacturing.It makes our tourist facilities more expensive.i.e. A hotel room that cost Ksh 20,000 when the US$/Ksh was 74, cost US$270 But when the US$/Ksh rate moves to Ksh 69 the cost is approximately US$289, a rise of US$19.Dont forget Agriculture and Tourism contribute a huge portion of our National Income.A weak shilling would be the best for these sectors.But a weak shilling would lead to an increase in inflation through higher oil/energy prices and the ripple effect to other sectors.
Higher inflation=Higher cost of living BUT a stronger shilling undermines our exports and makes it harder to set up manufacturing facilities for export oriented products and services.
STRONGER SHILLING OR WEAKER SHILLING that is the question.Which is the better one for Kenya?
It is formed under the (Central Bank of Kenya) CBK Act to advise the CBK on Monetary Policy.The committee is composed of distinguished Kenyans who have a record of having accomplished something in their respective fields. i.e. Prof. Terry C. I. Ryan( A former economic Secretary),Mrs Sheila S.M.R. M’Mbijjewe(Former Finance Director at Standard Chartered Bank) and Mr. Wycliffe Mukulu(A banking consultant).Click here to see the MPAC's latest report.
The issue of whether we need a stronger or weaker Shilling is one of the issues that the MPAC is studying.See more in the MPAC report.
The report states that they will hold regular media briefings to inform the public on their work.
Rumours
Heard a nasty one this week to the effect that a certain fast growing Bank wants to release its Accounts for 2006 by January 25th 2007.Utter,utter non-sense,it takes a while for all the issues between an auditee(especially a bank) and the external Auditors to be settled before the final accounts are issued.

For a large bank this would take upto early March(If the year end is 31st December).Unfortunately,this kind of baseless rumors are what are driving some sections the NSE.I pity the novice investors whose decisons are guided by such information.

23 comments:

coldtusker said...

Unlike the old days, the new method is to have continuous audits thus Identifying issues/problems early on.

The Directors provide the financials but if the auditors have been around the "discrepancies" are few.

I believe most banks report within 60 days though some take 90 days.

coldtusker said...

BTW... IMHO, it is not the KShs that has gained strength but the US$ that has weakened. When you compare the KShs vs the Euro, Yen & GBP... not much difference.

Nevertheless, as you say there are pluses & minuses. Flying to Kenya is much cheaper (thus more Eurozone tourists) coz in US$ e.g. most KQ flights are quoted in US$.

For exporters in US$, this hurts a lot. Rea's turnover was up but profits down... I think coz of US$ weakeness since that is the primary currency for their exports.

Kenyanomics said...

Kenya will be OK with weaker or stronger shilling, but only when it is the result of forex market transactions. Choosing either can lead to undesirable situations, such as extensive use of reserves by Gov. Mwatela and the company. We just have to learn how to live with currency fluctuations.

coldtusker said...

Kenyanomics speaks the truth... don't fight the market... look at the Bank of England that lost to George Soros!

The GBP was over-valued at the time but the Brits tried to "maintain" the strong GBP.

China also faces a similar problem i.e. they should REVALUE but they refuse to... It will hurt them eventually.

Benin "Mwangi" said...

Pesa tu:
Surely your post and arguments confirm the need for me to pursue graduate studies for economic policy.

From the amount of analysis that my current levels of understanding enable me to do, I would say that the weaker shiling is far more desirable for Kenya's hospitality industry, which parallels it's export industries.

The stronger shiling, as your comments have indicated cause regions that import Kenyan crops to import less or from somewhere else. As Coldtusker says let the hand of the market move as it wishes- it may be a better judge of Kenya's equilibrium point than even the most accomplished banking and finance directors.

Odegle said...

since kenya is a net importer of goods, what we need is a stronger shilling. those arguments about cost of exports and tourism dont hold water. look at this; south Africa is probably our biggest challenge as far as tourism is concerned yet the rand exchanges at 7 to the dollar. the only sure way of remaining competitive is not trying to muzle the shilling but rather, reducing production costs, eg power, road transport etc. i was told that its more expensive to move goods bwtn mombasa and Busia/malaba border that it is to move the same goods from india or china to mombasa. something must be done. instead of looking for the easy way out.
i was in nyali beach hotel last dec and i must say i was appalled by the standards. my door jammed all the time and the lights especially in the bath room worked on and off. the dinning area was so hot that even the waiters were sweating in their white shirts. yet this is supposed to be a high cost hotel fit to compete at international level? ngumu! and i you make it cheaper by making the dollar stronger, you only attract budget tourists who spend very little. no need!

Kenyanomics said...

Stronger or weaker Shilling ..... let the market decide. The state must not control exchange rates but they can eliminate taxes, which make Kenyan goods uncompetitive. Taxes on petroleum products, for instance, drive manufacturers crazy.

Ssembonge said...

he world is currently awash with dollars as the US trade deficit continues to balloon.

Americans consumer appetite for imports and oil has resulted in increased liquidity that is being felt the world all over. The fact that the Feds no longer reports the M3 money supply just goes to show that they could be printing money to support the buying spree. In turn the dollar has weakened.

The Chinese not wanting to disrupt their fragile and growing economy decided to peg the yuan to the dollar. their currency trends with the dollar thus their $1 trillion holdings is protected. You have to admire their brilliance.

Kenya is in the middle of a commodity boom and the demand for dollars has outstripped the supply.

That leaves gold as the currency of choice for hedging against a declining dollar. Gold always trades opposite to the dollar and is available through a number of funds.

pesa tu said...

@Coldtisker:U r right about Audits but no major bank can do it in 30 days.(after year end)
On forex there are pluse and minuses, but we need to decide on which one(then create policies that foster and favour sectors that will thrive under such a policy.

@: Benin-Mwangi: Am happy if this post has motivated u to do Grad studies.
Did you know that South Africa's Foreign Exchange transfer mechanism isnt fully liberalised?

pesa tu said...

@Odegle: We need to change our tact on tourism and chase value not numbers.Because we chase numbers most of the tourists we get r people who live in a council flat somewhere in England and think golf is a posh sport.We need to aim for lower numbers and for the Oprah's and Flavio's of this world.

What u saw at Nyali beach is afflicting the older Hotels at the coast.They need renovation/refurbishment but the current owners dont have the money and Local Banks wont risk lending to a tourist hotel.Take a look at Momabasa Beach and a few older ones, the problem is the same.

Its true sending a 20ft container by sea from Msa. to Dubai is cheaper than sending the same by Road from Mombasa to Nairobi.
The infrastructure u talked about needs goood policies and the will to do it.

pesa tu said...

@Kenyanomics: thanks for stopping by.The market isnt always right.(I guess you dont trade or speculate on the financial markets).

@SSembonge: which commodity booom is Kenya enjoying?
You are definitely a Goldbug.

Ssembonge said...

From 2004 to 2006;

Coffee prices have risen from 80 to 130 cents/lb

Tea prices have risen from 198 to 240 cents per kg

Exporters are laughing all the way to the bank. They are getting more bucks for their produce.

A quick scan shows that most commodities are up.

http://www.imf.org/external/np/res/commod/table3.pdf

You can check out www.cbs.go.ke for more data.

Ssembonge said...

Odegle,
We need a strong shilling to discourage imports and spur organic growth.

The pain of high unemployment is far greater than the pain of high price of imports fueled by consumerism.

Did CBK not report the first ever 'loss' because of their overweight dollar reserves?

coldtusker said...

Guys/Gals...

Some corrections/views on the above comments (IMHO).

ssembonge - Strong KShs 'enourages' imports not exports.

Odegle - S.Africans are vacationing abroad coz of strong Rand. Tourits visiting SA for specific high cost safaris. Better infrastructure means SA has a leg up.

Odegle - Weaker KShs could spur larger exports (horticulture), encourage local growth (sugar) while cutting imports (food products).

Odegle - Not picking on u, my friend... Nyali Beach Hotel is under receivership. Proper 5* is Serena. NBH is really 4*

Ssembonge - Yuan is overvalued & imports are restricted into China but this encourages a parallel market (market driven) for the Yuan.

Pesa Tu - Many US banks report within 30 days. Some even in 3 weeks!

Kenyanomics - Are you sure we aren't twins!

Ssembonge said...
This comment has been removed by the author.
Ssembonge said...

My bad, I tend to confuse myself.

We we need to make imports expensive and our exports 'cheaper'.

I didn't realize Nyali beach is under receivership. My friends who spent Christmas at the hotel said it was pathetic. Anybody knows if Diani beach hotel is okay? Or any recommendations for a VERY good hotel at the coast.

I can't believe that such a good hotel can go to waste when tourism is at its peak.

coldtusker said...

Pesa Tu also mentioned the forex restrictions in SA.

I was shocked to learn that upon arrival in SA.

The absurdity is that when S.Africans travel abroad, they can't buy & take forex (US$, GBP) but can take Rands which they can exchange abroad e.g. in Kenya.

Luckily for S.Africans, the Rand is the 'real' currency in most S.African countries just like KShs is 'forex' to Ugandans & Tanzanians!

My point is that the Rand is partly an artificial high. S.Africa exports natural resources thus the increased forex inflows.

S.African built cars e.g. BMWs, Mercs & Nissan Sanis have disappeared & replaced by Japanese, Korean, Indian & Chinese (trucks) makes.

Apart from accomodations, food & small gift items, I bought nothing in SA coz of the strong Rand.

Local industries were suffering against Chinese imports since the Yuan had 'weakened' vs the Rand. The excellent infrastructure meant there are no costly delays at the port for imports either.
P.S. This should not be an excuse for dilapidated infrastructure!

SAA suffers from substantially higher local costs while pricing their regional & international fares in US$.

Let the markets decide...

Odegle said...

i still hold that being a net importer we are better off with stronger shilling. i also maintain that instead of looking for an easy way out, we must look for other ways to remain competitive. for instance , it doesnt make sence that sugar made in brazil should be cheaper than mumias sugar in kisumu! even SA eggs are cheaper than ours in our country. i need to be convinced about that first. we can even make kenya a reexport zone and benefit from synergies

however i must thank you for letting me know that nyali beach is under recievership. i wish we had this post before i went there. but again look at the mara which is probably our cutting edge. have you used the road to that place?

coldtusker said...

Mara is an example where the management is poor. The Narok City Council wants fees but refuse to re-invest in the "business".

The stakeholders need to sort this out asap. The good news... it keeps the park healthier & less crowded!

MainaT said...

Pesa-tu, Infact in US/UK, being the 1st to report in your sector is seen as very positive thing from the investors' pt of view. And it is doable provided you have the IT systems and unlike Barc or StanChart, your numbers are done locally rather than in the UK.

In a liberalised economy like Kenya's, its nigh on impossible to dictate the right fx level as CBK can't beat the market. Saying that, all things being equal, a stronger shilling shows that your economy (or at least liquid parts) are attractive to foreigners.

pesa tu said...

@CT:Mara council is what u get when u elect semi-literate civic officials who have never travelled more than 200kms from where they were born.

@Odegle: We need to stop manufacturing some things in Kenya we are not competitive in matters of labour and infrastructure costs.

@everyone: We need some cheap credit scheme for the Tourism sector players

Anonymous said...

Hello,
Good stuff, good debate here. I don't agree that market forces should be allowed to dictate prices. That will only lead to disaster as no one else is doing it.

It is a tough market out there and only the savvy will prevail. The Trend globally now is towards manipulation, no this is neither a trend nor new. It is simply what has obtained since currencies were first created. The Dollar and the Euro are of course the greatest examples of this manipulation.

The yuan is manipulated to keep the US economy afloat. If the Chinese stopped buying American debt, where would the US get it? And in that collapse where would China get a market for its products?

kenyaimagine.com
emmo

pesa tu said...

@Emmo: So u r all for 'managed' manipulation like Japan and the rest of Asia?