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Friday, July 13, 2007

Kenya's Exporters Hurting - What to do?

The Kenya Shilling has appreciated considerably against the US$ (among other currencies). I shall focus on the US$:KShs since this is the functional currency for most exporters. The US$ has depreciated against other major currencies as well.

Furthermore, we need to "expand" what we consider our universe of exporters to include non-traditional exporters. We all know that Tea, Flowers & Coffee are exported. There are other sources including Labour i.e. Kenyan diaspora.

KQ is a net exporter - 90% of KQ's earnings are generated in forex. Visit any travel agent in Kenya & they will quote most KQ flights (except intra-Kenya flights) in US$... $299+tax, $499+tax... etc!

Kenol & Total (listed firms) are exporters - They have, well used to have, a significant business in re-exporting goods (petroleum products) to other countries e.g. Uganda & Rwanda. The strong KShs has hurt them but as I will show there are worse problems for them caused not by the strong KShs but incompetent & often corrupt bureaucrats.

Tourism - A well known source of forex. Booming but I think they can increase prices easily without hurting their business. This is the time for Kenya to shift towards more profitable tourism by lowering the number of tourists by skewing towards higher-priced tourism. The strong KShs just helps this cause.

Subsidies for Exporters?

No... No... No...

Exporters should not be subsidised like India plans to do... This would increase the avenues for corruption. The Goldenberg scandal started off as an "Export Compensation Scheme". This should be warning enough.

Government programs that involve forms, rules, regulations, procedured & "people" are bound to fail. Corruption is a hydra-like monster... It seeks out new ways to "eat".

Solutions?

The BEST "intervention" is to improve conditions for Kenyan export-oriented industries by improving/aiding their LONG-TERM competitiveness. Then let market forces prevail.

I believe the "secret" is in significantly improving the infrastructure while letting the best survive.

Roads

India has embarked on building their "Golden Quadrilateral" that connects major cities in all four corners of India. This will allow for faster movement of people & goods. Part of the impetus is to encourage exports to compete with China, which has created an impressive network of roads in the past decade, to facilitate exports.

Whereas the Yuan is artificially "fixed" to the US$, this will hurt them immensely in the future, China has built superb infrastructure & created an environment that helps their industries export goods all over world using special highways that lead to their ports.

This enabling environment works far better than any "devaluation" or "currency pegging" China performs.

Examples relevant to Kenya

Better (larger, fewer potholes & safer) roads from Naivasha to Nairobi's JKIA will decrease transport costs for Horticultural products thus increase profits despite a strong KShs. Lower transport cost will make Kenyan goods more competitive.

Better roads to & from the airports & ports will encourage tourism as well as movement of goods & people.

Folks dread going to & from the airport. CBD to JKIA should take 30 mins takes 90 mins! The roads leading from Mariakani & Miritini (industrial areas) to Mombasa Port are horrible!

Airports

KQ has been asking for a larger (Nairobi) airport for over 4 years. They could have consolidated their hold on the African market during this time frame creating a tough market for other to enter into. The delay in upgrading JKIA has cost them market share esp to N.American market. Now competition & barriers to entry abound from Ethiopian, Virgin & BA.

KQ needs a 2nd runway so an accident does not "close" the airport! For some inane reason the KAA is not building a 2nd runway! Currently domestic & international flights use the same runway! Nairobi is KQ's hub & closure of JKIA for even a few hours is very expensive.

KQ is a major mode for transporting perishable exports. Better roads & services to JKIA will lower costs for KQ who can pass on savings to exporters.

I say privatise the airports. BAA runs the UK airports. Why do we have a government agency running the airport? Leave immigration & customs in government hands if it is a matter of "national security" but the airport's functions need to be in private hands.

Electricity

Apparently Kenya has among the highest rates in Africa. Whereas Kenya does not have sufficient sources of "cheap" power, there are resources e.g. geothermal sources that can be exploited further. Olkaria can potentially supply 50% of Kenya's current needs.

A major reason for the obscene rates/costs is the corruption that has plagued various projects e.g. Turkwell Gorge. We need public review of these projects & a watchdog that is not beholden to politicians.

Further reductions in cost can be gained by improving the delivery/transmission. The transmission is plagued by crooks stealing wires, cables, transformers & oil. Kenya needs to introduce severe penalties & enforcement. The Chinese take drastic measures. I say so should we. Shoot on sight!

Lower electricity costs will help exporters become more competitive across the board despite a stronger KShs.

Taxes
Lower taxes, fees & licensing costs will flow to the bottomline of these exporters despite a strong KShs. Lower taxes & bureaucracy encourages more export-led growth. Sure it will increase forex flows but from sustainable growth.

Pay refunds in a timely manner. These are refunds! The government screws exporters by keeping this money interest-free! What a travesty! The idiots aka MPs & ministers draw interest-free loans while sucking it out of firms that are trying to create jobs!

Kenya re-exports oil products e.g. petrol, lubricants, etc but both Kenol & Total have indicated that they have substantially reduced their export business in 2006-7. The strong KShs hurts their profits but the interest cost hurt even worse! So it was not the strong KShs but the delay in refunds that led to reduced exports which in turn led to loss of Kenyan jobs!

Local Consumption (or lack of...)
We need to have a sustained campaign to encourage the consumption of local products that are exported. This includes coffee, tea, flowers & tourism. Why do we drink sodas instead of tea? Creating local demand brings stability to some sectors.

It pains me to see butter from New Zealand & Ireland while we have KCC. KCC is forced to find export markets! Increased consumption of local production reduces the need to export "at all costs".

International Barriers & Tariffs
Kenya needs to stand up to the EU, Japan & USA (esp the EU) in matter of fair trade. Fight the "subsidies" that EU provides its farmers. This will allow Kenyan exporters get a better price for their produce. Better price realisation will decrease/mitigate the pain from a stronger KShs. These EU subsidies lower the "cost" of their products that are exported to Kenya! Our farmers lose benefits from economies of scale since they can't compete against EU subsidies.

Imports of Industrial Goods
This is the time for GOK to encourage local construction firms & industrialists to import "Capital Goods". Kenya should not be encouraging imports of consumables like butter, biscuits & sugar!

We need heavy machinery to build new roads & we need to build local capacity by providing incentives e.g. lower import duties/taxes on such machinery. Kenya does not manufacture heavy goods/machinery but needs these to boost its infrastructure. This will benefit us by reducing the quantity of forex in Kenya while allowing us to jump-start economic growth.

Tea, Coffee & Horticulture
There is excess tea in the world marketplace. Let's reduce new tea plantings for now. Instead we need to focus on higher quality & "origin" branding. Since the tea industry was privatised there has been considerable progress. I watch with disdain & horror as the idiots called MPs want to put KTDA back into government hands... Sigh...

Coffee can be far more profitable if Kenya cuts a deal like Ethiopia did with Starbucks. In fact we can produce more coffee & achieve higher realisations! So a strong KShs notwithstanding, we make more money in US$, Euros & KShs!

The Horticulture Industry needs reforms. We need to target the higher end of the market by value addition. Let's produce less but get the same or increased income.

The environmental impact is huge esp in the riparian areas of L. Naivasha & L. Nakuru. We might be getting negative returns from our horticulture ventures after factoring in environmental degradation.

Conclusion/Summary
A strong currency is not necessarily a bad thing. I have not addressed other issues like GOK borrowing, massive corruption, etc. There are many other ways to strengthen the economy whose benefits will flow to all Kenyans.

We need to improve Kenyan institutions & think long-term NOT fix a short-term problem by sacrificing long-term growth.

Under a strong KShs, jobs will be lost in some industries/sectors but substantial gains will be made if we start an infrastructure construction-led boom. The lowered costs of economic activities will rein in inflation & reduce the hurt felt by a stronger KShs.

6 comments:

don said...

brilliant... absolutely billiant.

Anonymous said...

all currencies (non manipulated ones) have risen against the dollar so the difference is the same - kenyan flowers and are more expesnive in dollar terms but the euro and the pound has also risen against the dollar.

Also a weaker dollar mans the living standards of kenyans have risen in dollar terms which menas the horticultural farms can start supplying the kenyans market as an alternative to europe - also we have tgrowth in tourism which is another market.

I agree infrastructure, infrastructure,infrastructure thats the difference thats a big apart of chinas success.

Also lest we forget our core market is africa, we need to build roads and infrastructure that links with this markets we need a freeway from mombasa to Bujumubura and another from arusha to addis ababa. Its ironic that the osuth of ethiopia is the most fertile part of that country an dthe road links to kenya are non existent.

3 diversification we need to diversify and establish a truly financial center for our region in Africa. we claim to be but we are not yet. _ we need to develop more sophisticate currency options, develop futures and options markets.

im not sure how remittances come into play. but i used to send more money when the economy was to the dogs than i do now. I dont know about other people.

coldtusker said...

Africa is Kenya's largest export market & it will grow much faster if Kenya builds/funds a highway from Mombasa to Kinsasha!

KPC is starting to expand the pipeline to Western Kenya but eventually it should run all the way to Zambia.

Why should Africa export raw materials to China?

Why can't Kenya become the "hub" for value addition?

MainaT said...

Welcome back CT! The only thing to add is we've and are continuing to neglect our railway lines to our cost. Studies have shown that its actually easier and cheaper to build and maintain railway lines than roads especially where you take into account the benefits for the economy.
In the short-run, we have to find quick fixes to allow for cheaper production costs. So target electricity; road bypasses in NBI.

Anonymous said...

fine,fine recommendations i say? do the guys drawing tax-free salaries think along the same lines?

@ct
agree with you on the roads (terrible in mombasa,EAs largest port).what i ask is,just as we have a pipeline company,cant there be a road company that can finance construction via long term bonds rather than the way its done now (recurrent expenditure)?it can then be granted toll rights to complete the business model.
as for JKIA,if there's no 2nd runway,where's the budgeted 10billion going to?

@anon
futures and options markets are known for mindboggling sums and crazy volatility driven by leverage.given that we are 'destabilised' by a simple IPO (kengen,safcom),does nairobi have what it takes to cope?

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