Why weak shilling failed to lift Kenya’s exports

Kenya’s exports last year upset expectations by falling against what was a more than one fifth depreciation of the Shilling against major world currencies, including the US dollar, Euro and British Pound.

While the exports had been widely expected to grow, data from the Central Bank of Kenya, through 10 months to October 2023, shows total good exports fell by 2.1 percent to Sh978.7 billion ($6.104 billion) in the period.

According to the International Monetary Fund (IMF), Kenya’s exports underperformed last year as exporters struggled to obtain hard currency to import intermediate goods which are usually processed to create exports.

“Exports are projected to have underperformed in 2023 due to forex market dysfunction, for example, through increased transaction costs of securing FX [foreign exchange] for imported intermediate goods,” the IMF stated.

The IMF observed the extended strife in obtaining hard currencies in the market as the interbank FX market remained dormant while spreads in the bank-client market remained large in most cases. 

Secondary data from the CBK shows the importation of intermediate goods, excluding oils, which are usually processed into finished goods set for both domestic and foreign markets fell by 15 percent through 12 months to October 2023 to Sh1.8 trillion ($11.57 billion) from Sh2.21 trillion ($13.79 billion).

The underperformance in exports has exports underlying weaknesses and the loss of competitiveness in the economy.

Bumper exports are usually expected when local currency’s slide as domestically produced goods and services become cheaper for trading partners leading to the buyers increasing their demand for the cheaper goods.

On the flipside, however, imports become more expensive in home currency terms, forcing residents to demand less, including intermediate goods which make key inputs in the manufacture of exports.

The IMF has, however, previously warned of shifts to the traditional paradigm as more global trade is conducted in just a few currencies.

“There is growing evidence that most of global trade is invoiced in a few currencies, most notably- the US dollar. In fact, the share of US dollar trade invoicing across countries far exceeds their share of trade with the US,” the IMF stated in a July 2020 note.

Despite the deteriorating exports, the current account balance as a percentage of GDP is estimated to have largely held up at 4.1 percent at the end of 2023 with a faster drop in imports offsetting the upset in export earnings.

Total imports through 10 months to October fell by 14.7 percent from Sh2.6 trillion ($16.2 billion) in the comparable 2022 period to Sh2.2 trillion ($13.7 billion).

Beyond difficulties in sourcing for FX, the IMF has observed that Kenya’s export competitiveness and complexity remains low with its exports to GDP ratio having nearly halved in the last 10 years.

Exports per capita/per head have drifted away from comparable peers in East Asia emerging markets while regional peers including Ghana, Rwanda and Tanzania have been narrowing the gap.

The IMF has asked Kenya to strive in improving its export competitiveness with the goal of improving external buffers and debt sustainability.

“In addition to enhancing exchange rate flexibility, improving government effectiveness, regulatory quality and better governance, and anticorruption framework along with improvements in trade policy and information technology infrastructure could help boost Kenya’s export competitiveness,” the IMF added.

Source: Business Daily

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