Policies & Implementation

Post date: Sat, Jun 2, 2012
Category: General
By: IEA Kenya,

Simon’s comments and short article on policies and implementation has raised a number of issues which I want to contribute on. He essentially talks about 3 issues, namely (1) what Kenya’s BOP position means in general for the economy, (2) he makes assertions that Kenya ‘imports and exports same products that we can get locally’, and (3) that monetary policy is the solution to getting out of the current mess (read as depreciating value of the shilling) and he suggests to adopt a less volatile currency that are not bound to ‘global fluctuations’ amidst a world economy that is going into a recession lead by the US.

Let’s start by examining the first statement on Kenya’s BOP position. Simon notes that the BoP position has been worsening with a deficit year on year, this could be furthest from the truth. Kenya has actually witnessed BoP surpluses currently (January 2011) standing at USD 199Million down from USD 849Million in January 2010. (see CBK publications)

Keep in mind that BoP is made of various classes of transactions, simply defined, the current account and the capital & financial account. In Kenya’s case the current account deficit has widened to USD 2.73 Billion from USD 1.65 Billion for the period January 2010 to January 2011. This is mainly driven by merchandise trading whose deficit increased by over 20% compared to service which had a surplus of about 2.5%. However, a current account deficit cannot be said to be either good or bad, one has to examine the underlying causes for a full analysis.

Secondly, the current account represents only half the story in the analysis and therefore has to be analyzed in comparison with the capital and financial accounts, because at the end of the day the two have to balance and any inequality signifies that one country acquires assets in another (I’ll come back to this later). Therefore any deficit in the current account will be reflected by a surplus in the capital and financial account and vice versa. Kenya’s capital and financial account stands at a surplus of USD 2.93 Billion as at January 2011 from USD 2.50 Billion as at January 2010.

Essentially what this means is that a deficit in the current account does not necessarily mean that Kenya is in a bad economic situation or that Kenya is implementing bad economic policies. What it means is that Kenya is importing capital, and a quick glance over the import bill confirms this, imports of manufactured goods comprise 27 % and machinery comprising of 23% making up over half of the total import bill and oil rising by 26%. These are mostly consisting of intermediary inputs in further production processes as well as re-exports to the regional markets.

A country is more likely to have a deficit in its current account when it has:- higher prices- commodity prices have been going up in the primary export markets as well as domestically; the higher its GDP-Kenya’s GDP is the highest in the region; the higher its interest rates- Kenya 91 t-bill rate 9.15, Uganda 91 t-bill rate 14.88 (2011); lower its barriers to imports-low relevance given EAC-CET; more attractive investment opportunities-maybe due to Nairobi as a hub for East and Central Africa; and higher exchange rate- Ug Sh has been narrowing with the dollar, TZ Sh weakening with the dollar so a bit mixed. The effect of one of these factors on the current account deficit cannot be considered without looking at the other causal factors.

So what does all this mean, well a current account deficit is a response to the conditions in the country it may be a response to excessive inflation, low productivity, inadequate savings or high return on capital/ investments. What we need to figure out is what this means for economic policy, I’ll do a brief analysis on this as I examine Simon’s 2 other statements in my subsequent posts when I address trade policy making and the relevance of economic theory.

Ps: The post is in rebuttal to an opinion/article on Policies and Implementation

Check the link below

http://www.facebook.com/groups/euesaafass/doc/161157137296155/

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