Sunday, 23 November 2014

Weak Kenya Shilling: should we mourn or pop the champagne?

THE KENYA SHILLING  has weakened against the US dollar in the recent weeks shaving of nearly five per cent in just about two months. Now the exchange rate stands at 90.25 to the US dollar buying down from KES 86.21 in January this year, a 4.7 per cent decline.

It is a decline that sparked off a debate on whether Kenyans should mourn or cheer the weakening the shilling; is a weak shilling a bad thing or a good thing? It is a bit of both.

 But first let’s understand why we need more shillings to buy the US dollar. And the first question we should ask is; which is changing, the shilling or the dollar? And what are the implications.

 Our thesis the shilling has not weakened; it is US dollar that has strengthened against other major currencies including our dear old shilling. The Dollar has been strengthening against other currencies including the Euro and the British Pound.  It has gained by more or less the same rate against the Euro and the British Pound as the Kenya shilling, that is, 4.7 per cent.This is why the shilling has gained against the the British Pound Sterling and the euro. Therefore there is no reason to panic.

 The  trend of the shilling then means that the effect on the economy could be neutral.  It may not strengthen or weaken our balance of payments position.  Exports may not be higher cheaper where In Euro zone  against whose  currency the shilling has strengthened. 

Let’s look at the import side first. Kenya’s imports are largely Crude oil which constitutes 25 per cent of our annual import bill. Oil is an inflationary import in our basket and the price of crude oil is shrinking. Over the last six months crude oil price has declined 24 per cent from US$ 97.5 a barrel in Mid-June to $74.25 a barrel in Mid-November. This has translated into low pump prices which are expected to continue declining.

 Such declines mean savings for the motorists and manufacturers. We therefore expect a lower price regime next year since the price of electricity is also down 25 per cent since August and is still declining as more geothermal power comes on stream. So inflation, one of the potential results of a weak shilling, will not happen.

 If anything inflation is likely to fall even further. In fact, according to Leading Economic Indicators published by the Statistics office, Inflation declined from 8.36 in August to 6.6 in September declining further to 6.43 in October. Low general prices mean more money for consumers to spend setting the stage for economic growth.

 On the export side, Kenya’s largest export is Tea whose price has shrunk in the recent past. However, a weak shilling will increase the amount of shilling per kilo. Again this will put more money in pockets of our farmers, increasing their capacity.

  Kenya, as a tourist destination will become competitive as a result of the weak shilling. However, tourism benefits will depend on whether the hot heads at the coast cool down or the government manages to neutralize them.  For now tourism is not on the radar as Kenya economic driver.

Don’t pop the champagne yet neither should you sing the dirge for the shilling. However, the Horizon does not look bad. Keep the lid on you may need to pop it in the first quarter next year. For those to whom Christmas means anything, this may not be a miserable Christmas.

Thursday, 13 November 2014

Where will Tanzania’s per income per worker be in 2030?

 IF NOTHING CHANGES, the average annual earnings per worker will rise from US$1 200 a year to US$ 1,900 a year. That is the current annual income level per worker in Senegal.  That is hardly the kind of progress that Tanzanians expect in the next 15 years, says the World Bank. Yet, with the right policies, one can expect Tanzania to become the Vietnam, Indonesia or even the Thailand of tomorrow, it concluded.

In 2012, the average working Tanzanian earned the equivalent of $1,200 per year, one of the lowest earning levels in the world. Most workers, about 85%, are employed in traditionally low-productivity areas such as agriculture, retail trade, and small-scale mining where the output per worker is averaging only $700 per year. By contrast, output by worker averaged $4,500 in emerging industries.

 There is no denying that Tanzania has performed well over the past decade. Her economic growth has been  7% per year or thereabouts. This growth was driven by a few strategic areas such as communication, finance, construction, and transport.

However, this remarkable performance is not enough to provide productive jobs to a fast-growing population that will double in the next 15 years. With a current workforce of about 20 million workers and an unemployment rate of only 2%, the challenge for Tanzanians clearly does not lie with securing a job. Rather, it is to secure a job with decent earnings.

By 2030, Tanzania’s workforce will grow to 40 million workers who will need productive jobs. International experience suggests that the workforce will have to shift from traditional toward emerging businesses to create them. In Thailand, for example, agriculture represented 80% of the employment force in 1990, while it was only 50% by 2005. In Indonesia, the share of agriculture in total employment declined by almost 20 percentage points between 1990 and 2010.

Can Tanzania implement necessary structural shifts in the next 15 years and become a middle income industrialized economy? The response is NO if the economy continues on its recent trajectory. Indeed, at current growth rates, the share of the population employed in emerging industries will marginally increase from 14 to 22% between 2012 and 2030. Perhaps not so bad, but the average annual income per worker will only increase to $1900 by 2030 says the a world Bank in a document titled  Country Economic Memorandum

This modest structural transformation of the Tanzania employment force is not explained by the lack of dynamism in emerging businesses. Their average annual growth rate has been close 10% per year since 2008, which is higher than rates reported by Indonesia (8%) and Thailand (6%) during the same period. Arguably, it will be difficult for Tanzania to do much better in the foreseeable future.

It will take simply longer for Tanzania to increase her share of the labor force working in emerging businesses, where currently, only 15% of Tanzanians are employed. The starting point was more than 20% and almost 40% in Thailand and Indonesia. Another explanation is that the rapid growth of modern businesses has not been accompanied by a similar increase in jobs. This is expected for low-labor intensive areas such as finance and communication, but it also happened to some extent for construction and tourism. While growth in the construction industry surged at a cumulative rate of more than 50% in the last five years, employment in this sector only increased by 25%.

Tanzania needs to raise productivity in traditional areas, which will continue to employ the majority of Tanzanians in the coming years. In parallel, the economy will need to extent and diversify toward new industries and markets. This is the gist of the World Bank’s recent Tanzania Country Economic Memorandum: Productive Jobs Wanted (CEM).

These two objectives will require a combination of actions that are detailed in the CEM, as well as many examples of concrete actions based on international best practices and Tanzania’s relevant experiences.

While cross-cutting actions are central, policy-making might require some degree of specificity – otherwise there is a risk of diluting implementation and wasting scarce public resources. For this reason, the Country Economic Memorandum also attempts to identify some industries on the basis of the country’s comparative advantage, their potential for growth, and for their ability to create multiple jobs. Along those lines, the movie industry, or ‘Swahiliwood,’ can create multiple jobs in the right environment. Short-term opportunities also exist in the leather industry, high-value vegetables and tourism. Such drive can be encouraged by a focus on quality (raising standards and skills), improving access to regional and global markets (port efficiency), and possibly pro-active promotion policies in selected areas. 

Let’s assume that the implementation of the CEM action plan will lead to an increase in additional productivity of 1-2% per year compared to historical rates. In that case, the average income per worker will reach almost $3,000 (in 2012 dollars) by 2030 or close to the levels reported by Vietnam today. If Tanzania can generate additional productivity gains in the range of 5%, over the recent historical trend, the average income per capita will reach $6,000 by 2030! This is Thailand today. Such goal might appear very ambitious but possible if the above mentioned action plan is implemented with a sense of urgency and the country adequately manages its resources derived from natural gas. Such performance was achieved by China over the past decade and by other emerging economies during shorter of periods of time. Of course, to replicate these successes, Tanzania’s will not just need to be good, but very good.

By World Bank

Sunday, 9 November 2014

Africa Oil to reduce stake in Kenya by early 2016

AFRICA OIL which has a 50 percent stake in Kenyan fields where commercial reserves of crude have been found, wants to offer part of its holding by early 2016 to a new partner that can help it fund development, the chief executive said.

Africa Oil and its existing partner Tullow Oil, which holds the other 50 percent, have found more than 600 million barrels of recoverable reserves. A final decision to develop the fields is expected in the first quarter of 2016.

The discovery is part of a string of oil and gas finds stretching from Uganda and along Africa's east coast that have made the region one of the world's hottest untapped hydrocarbon provinces. Output could reach global markets in 2018 or 2019.

"Before project sanction in 2016, we probably would like to have a partner," Africa Oil CEO Keith Hill told Reuters, although he said the plan was "not carved in stone" and the company could finance development itself if needed.

The Toronto- and Stockholm-listed firm aimed to reduce its stake via a so-called "farm down" deal that would leave Africa Oil with a smaller share. As payment, the new partner would reimburse costs of Africa Oil's exploration to date and commit to pay future development costs until first production.
Asked what stake Africa Oil would keep, Hill said at the firm's Nairobi offices: "That'll be the biddable item. We'd love to stay in at about 25 percent."

“I think the window is going to be between 20 and 30 percent,” he said of the amount the firm was likely to be able to retain. "A lot depends on how our drilling campaign goes on."

Tullow, the operator of the Kenyan concessions, and Africa Oil plan to drill up to eight wells to open up new basins in 2015 in the search for extra reserves.

Hill said Kenya's plans announced in September to impose a capital gains tax on energy firms, possibly as high as 37.5 percent on foreigners, could deter new investors in Kenya. But he said he did not believe the tax would impact a "farm down" deal as there would be no recorded capital gain.

A government official has said the capital gains tax was still a subject of debate. As it stands, the law is due to be implemented from Jan. 1. A withholding tax that could have had an impact on the "farm down" deal is being scrapped this year.

Kenya, Uganda and other partners still have to finalise plans for a pipeline that will connect the Ugandan and Kenyan fields with the coast at a cost of about $4.5 billion.

"Every day that we wait before settling the route is a day that we add on to first oil,” Hill said. But he said the route across northern Kenya and the commercial structure were expected to be agreed by the end of the first quarter of 2015.

Hill brushed off a fall of more than 25 percent in oil prices since the summer, saying it would not derail the project.

But he said the decline in oil prices had contributed to a drop in the firm's share price that could make it more expensive to seek additional funds, which it might do around mid-2015.

"As far as being able to raise money in the market if we need to, we are not that concerned about it,” he said, adding Africa Oil had $350 million in cash at the end of June 2014.

Africa Oil's shares have fallen from about C$7.30 ($6.40) at the start of July to below C$3.50 this week. As well as tracking the fall in crude prices over the period, the share price slid when Kenya announced its capital gains tax plans.

Tuesday, 4 November 2014

Tanzanian GDP is 28 per cent larger- sources

THE TANZANIAN economy is  larger than previously estimated, we can authoritatively report. The rebasing exercise, whose results are yet to be released, found that the economy was more than 27 per cent larger by the close of 2013.

Two weeks ago, this publication estimated Tanzania’s GDP to be higher than US$33 billion previously estimated. Now the actual size has been found to be almost 28 per cent higher. This puts the GDP at the end of last year to US$42.51 billion at the January’s exchange rate.

Re-basing of the national account series (which includes the GDP) is the process of replacing an old base year with a new and more recent base year. The base year provides the reference point to which future values of the GDP are compared.

Re-basing is meant to reflect recent developments in the economy and expand the basket of consumer goods to reflect changing tastes and preferences. Consequently, countries re-base their economy once in a decade although the UN recommends that re-basing be done every five years.

The structure of the Tanzania has changed dramatically since 2001 with new industries coming up especially in the mining sector. The services sector has also posted tremendous, discernible growth with the telecommunications sectors growing from an estimated 500,000 telephone lines in 2001 to nearly 28 million as at the end of March 2014.

 In 2001 internet communication was through cyber cafes and was expensive. To date internet is available on the majority of handsets. There was no mobile money transfer then, now it is diffuse.

Although there were some LNG resources at Sonko sonko, they were not fully exploited and the quantity of LNG available in Tanzania is estimated at 53tcf.

Concomitant with the elevation of GDP will be the rise in GDP per capita which will see the country move closer to achieving its target of being a middle income economy by 2020. Estimates based on the 2012 census place the population of Tanzania at 47 million. This works to a GDP per capita $904 compared to $708 in the current estimates.

 What are the implications of a larger GDP?  Several things come to mind. Among these is that Tanzania has to take a hard look at her taxation policy.  According to the current budget estimates, domestic revenue was expected generate US$7.4 billion, that is 65 per cent of the US$12 billion national budget estimates. Going by the same rates, that is 22.3 per cent of the lower GDP, then Tanzania should raise some US$9.46 billion from domestic revenue which is 79 per cent of the budget. In fact, Tanzania which is currently suffering withdrawal of donor support, can comfortably bridge the gap from domestic taxes.
The new larger economy means that Tanzania must start thinking big and invest big to support the larger economy.  She has to start investing in infrastructure, especially transport in order to support increased economic activity. Top on the agenda should be investment on the central corridor.
A report by the Africa Development Bank shows that the central corridor is scantly used due to the fact that much of it is not paved. 

 Consequently, average annual daily traffic on large sections of this corridor is less than 1000 vehicles only 40 per cent of the corridor boasts of an AADT of more than 1000 vehicles.  This compares negatively with the traffic population on the Northern Corridor where AADT is 3000.

The implication is that investment is needed on this corridor to make it a viable route. And now that Tanzania is investing in Bagamoyo Port, Investment in roads and Highways is urgent. Without these, investment in Bagamoyo port will be a white elephant.

With the rebased GDP, we expected the quarterly and annual growth rates to change. Economists say they will not be surprised if Tanzania has been posting double digit growth for a while now. A larger economy demands lots of support investments to keep it growing. Among these is the nation debt –GDP ratio.

 The national debt to GDP ratio which by end of April stood at US$17.853, say the Central Bank of Tanzania.  At the old estimates this amount of debt was the equivalent of 53 per cent of GDP.

 A debt ratio higher the 50 per cent of one‘s income is considered irrational. However the new base year will trim the debt ratio to 42 per cent of GDP. Tanzania will thus be comfortable to borrow US$1 billion in the Eurobond market; she can even take more to finance her infrastructure development