Kenya on currency upgrade….

46 years after Kenya started printing its own notes and coins, the Kenyan government through the Central Bank has decided to do a currency upgrade. One that will no longer bear individual portraits. This is a quite commendable decision since politicians won’t have to struggle to have their pictures on notes and coins to portray tribal dominance and all sorts of selfish interests.

As far as currency upgrade is concerned, there a number of things that have to be put under careful consideration. Kenya is big than any particular individual and the tax payers concerns have to be addressed before anything else. In my opinion, this decision has had a really bad timing. Reason being, we’re seeking to integrate the East African Community and one of the proposed ways to do so is having a common regional currency. . .(I smell ideological mismatch)

From a different perspective, the KSH is still rallying against the USD and it has not even rested from last year’s record low of 107. If am not wrong, the currency upgrade plans would mean that, we’ll have to import some sort of materials (only God knows what), and that will not do us any good as it will impose more pressure on our Current Account which is already in deficit.

We’re about four months away from June and you know what happens then. . .(hint: the budget). I bet we’ll have a huge budget for the FY 2012. That aside, we’re headed for elections and you all know what happens when the campaigns are on set. ‘Our’ politicians demand more money for publicity purposes which means more cash has to be printed at the end of the day. Its sickening thinking of the many things we’re yet to achieve in regards to the new constitution.

What’s your opinion?. .is currency upgrade a dream farfetched?

The MPC holds the CBR at 18%

For a 3rd time in a row the Monetary Policy Committee (MPC) has decided to hold the Central Bank Rate (CBR) at 18% for reasons well know to them. A couple of my pals had mixed thoughts in regards to the decision that the MPC made on 06/03/2012. Most of them were of the opinion that the MPC should reduce the CBR by between 50 to 100 basis points. Their arguments were based on the fact that inflation pressures are easing up having recorded a low of 16.7% this month, and some went even further to use the strengthening shilling trend to back up their arguments.

A reduction of the CBR would have implied that the interest rates would have to be slightly reduced which in my view, could have been music to the ears of many Kenyans still struggling to repay their bank loans.

Nevertheless, i’m quite comfortable with the decision adopted by the MPC to hold the CBR as it were. The committee could not have been too quick to reduce the CBR just because everything else seems to be reducing. . .or working in our favour. As the saying goes. . . ‘dont count your chicks before they hatch’, the shilling is at threat of weakening if the international fuel prices are anything to go by. The inflation is not spared either since we don’t have favourable climate that would at least promise continuous food supply.

The best the MPC could have done is to hold on the 18% margin until such a time we are assured that inflation will gradually decrease and the shilling strengthen in the long run. Mmhh. . .that implies we’ll have to wait for a couple of months to ease the burden on our shoulders.

Endorse corporate governance or reap capital losses from your life time investments.

In the past couple of months, we seen lots and lots of companies collapsing others being placed under statutory management ..and some are still struggling to solve internal wrangles. All this issues have resulted to drastic reduction of investor confidence in such companies and in the entire industry which they operate in.
About four years ago, the Kenyan stock market experienced a devastating collapse of prominent stock brokers (Ngenye Kariuki, Nyaga stock brokers and the likes). According to some reliable sources, the collapse was attributed to poor management, fraud committed by some employees among others. But anyway, thanks to the Capital Markets Investor Compensation Fund that is trying by all means to restore investor confidence in the bourse.
Success and goodwill of renowned companies anywhere in the entire world, is rooted in its corporate governance. Corporate governance has been defined in the Capital Markets Act (Cap 485 A) as, the process and structure used to direct and manage business affairs of the company towards enhancing prosperity and corporate accounting with ultimate objective of realizing shareholder ultimate value while taking into account interest of other stakeholders.
In investing in companies, investors want to feel secure in all terms ranging from, a promised return on investments to risk minimization. It is the duty of the company’s board to exercise effectiveness in handling all business affairs and decisions since such carry a potential risk that could adversely affect the company. CMC Motors and East African Portland Cement Company (EAPCC)will act as very good case studies in the Kenyan history of management wrangles. However, we cannot fail to acknowledge the massive efforts taken by the Nairobi Securities Exchange in regards to demutualization.
Simple Corporate Governance Principles:
a) Strike a balance between management roles and organization objectives.
b) Establish the level of integrity of those who can influence the company’s strategy and financial performance.
c) Meet information needs of a modern investment community i.e. Financial and non-financial info.
d) Recognize and uphold shareholders rights (Logic behind shareholder wealth maximization)
e) Make rational business decisions considering all risks associated with each.
f) Ensure that every board member is effective and well equipped to undertake tasks assigned to each.

Interest rates and Speculative demand for money

Information is power, although most if not all of us end up burning our fingers after realizing we closed a lemon deal. This is the very time you get your head spinning really fast. Before getting in trouble, take time to internalize all the information that’s within your reach. I’ve always been here for you breaking the market facts down for you..and we’re doing it once again. Sit back and enjoy the breakdown
There are basically three main motives why people demand for money:
i.) Transactionary motive
ii.) Precautionary motive
iii.) Speculative motive
In this post, I’ll focus on the speculative motive. First though, to understand the logic behind ‘demand for money’ I will sort of start by giving a brief explanation of what transactionary and precautionary motives entail. Transactionary motive relates to the demand for money to satisfy daily basic human needs (food, shelter & clothing), while precautionary motive relates to demand for money to cover for unexpected future events e.g. sickness among others.
Speculative demand for money stems from uncertainty about the direction of changes in interest rates. If people feel the present level of interest rates is lower than it should be, they expect interest rates to rise in the near future. The rise in the interest rates leads to a fall in the bond prices since there is an inverse relationship between bond prices and interest rates. This basically implies that anybody holding on bonds under such circumstances may suffer a potential capital loss due to the decline in the bond prices.
When people expect interest rates to increase, there will be a demand for money balances. By holding money, one can avoid the expected loss that is associated with holding bonds. Therefore, one will be in safe position to purchase bonds more cheaply since their prices have fallen.
On the other hand, if people regard the current interest rate as being too high relative to what might be considered normal, one would definitely expect the interest rates to fall. This will lead to speculation since people with such expectations will prefer holding greater amounts of their wealth in form of bonds. This will be advantageous as capital gains will accrue if interest rates do fall and bond prices rise.
This scenario relates 100 percent to the Kenyan economy as it is currently experiencing an interest rate hike of about 19 percent, all in the name of ‘controlling inflation’. Therefore holding money/cash would be the most appropriate option for those expecting the interest rates to fall. Similarly, anyone who expects interest rates to fall will hold bonds rather than cash in order to realize possible capital gains.
Stick around for more tips on how to navigate in the bond market

Free Floating or Fixed Exchange Rate System?

The weakening of the Kenyan Shilling is no longer news to the ears many of us by now, since we’re probably getting used to its downward trend. Almost all measures taken by the MPC to try and put the situation on the ground under control have proved futile. Having some knowledge on economics, I bet it’s time to try and change the rules of game and may be the ‘referees’

In the light of international trade, exchange rate stability is very crucial since it relays the level of competitiveness of the market participants. In order to equally achieve the key monetary objectives, it’s advisable to understand the impact of exchange rate stability and how it works. I believe little knowledge is always better than none.

There are various types of exchange rate systems i.e. free floating exchange rate, fixed exchange rate system and the dirty managed system. In a free floating system, the value of one currency is basically left to fluctuate depending on the market forces of demand and supply of currency in the forex market. Under the fixed exchange rate system, the Central bank intervenes by setting a benchmark within which the domestic currency should fluctuate. On the other hand, under the dirty managed system a country adopts the free floating system but in the face of exchange rate instability, the government through the central bank intervenes by effecting the fixed exchange rate system.

Kenya has embraced the free floating system though it doesn’t seem to bring to light its advantages. This is because there is a lot of speculation in the forex market and we’re facing major BOP problems (reduction in exports). Given all the prevailing circumstances in the country not to mention the biting inflation, it would be advisable to review the current exchange rate system and maybe consider adopting fixed exchange rate system. Even though the system will provide a short-term solution, it would help ease up some little pressures we’re exposed to. Reason being, the system would reduce the level of speculation, put inflation on check and if adopted as a long-term solution, it would really help in bringing the interest rates down a move that would stimulate the economy in terms of trade and investments.

Making Smart Investments

From the performance of the NSE 20-Share index for the past 6 months, its quite evident that the level of investor confidence in the Kenya bourse has declined drastically. This is despite the measures taken by the market regulators and to some extent the players to boost the confidence. The bearish nature of the market can be attributed to the weakening of the shilling, rising inflation, volatility in interest rates, political pressures as well as some company/industry specific factors.

The skyrocketing cost of living is also a major contributing factor to the decline in the trade volumes as some retail investors dispose off their shares to get money to cater for their daily basic needs. In a bid to curb inflation, the Monetary Policy Committee (MPC) is trying to use the interest rate to put the situation under control. however,the impact of increased lending rates will be continually felt by the retail investors who are locked out of the stock market, and it doesn’t get better as they can hardly access financing from the commercial banks.

Smart investors make SMART investment decisions by; widely consulting and conducting the necessary research in regards to where one wants to put their money. It might seem like a whole lot of work, but then again if you don’t want to end up biting your fingers as result of  ‘lemon deals’ u’ve gotta do your homework and do it well. Just because a prominent company have issued an IPO, it doesn’t necessarily imply that the shares will obviously shoot. Take time to consider the following:

• Nature of the industry that the company operates
• Nature of the business carried out by the company
• Nature of competition in the industry
• The company’s growth prospects
• The management team (intelligence level)

For those watching trends in the stock market closely, various signals are relayed. To some if not all of us, the bearish nature would mean that stocks will get cheaper and it ‘maybe’ an investment opportunity.

With the prevailing market uncertainty, its not advisable to take a loan in order to invest in shares. I believe investments should be made after sufficient amounts for savings and consumption has been set aside. Invest what you have or better still form viable investment groups which will help you pool your resources together and get a better deal.

Those looking forward to diversify their portfolios should consider foreign stock exchanges as an alternative. This is evident from the just concluded Bank of Kigali IPO that was oversubscribed by a good margin of 174%. This shows increased investor confidence in foreign stock exchanges.

well..that’s my opinion, what’s yours? feel free to share by leaving a comment

Pertinent issues in Taxation

In this blog we analyze stuff and break it down in the easiest way for the ordinary mwanachi not to miss a thing. It’s all about the people anyway.

We are all very excited by the fact our MPs will be paying taxes though some have remained adamant on the issue giving all sorts of reason which if you asked me, they’re invalid. We’ve all been paying taxes and the most inevitable form being VAT which is currently set at 16%.

With MPs paying taxes, revenue collected by the Kenya Revenue Authority (KRA) will most definitely increase by a huge margin. One of the most significant roles of the government in any economy is revenue allocation, which is mostly done through preparation of some budget at the end of a fiscal year. The purpose of revenue allocation is to bridge the gap between the rich and the poor. This has however not been successful as the gap is widen day by day making the ordinary ‘mwananchi’ bear the burden of living below the poverty line.

Of interest to most Kenyans is how the increased revenue will be utilized. Over the years we have seen the government use part of the revenue so collected in provision of public utilities but that’s not all as the same old procedure has been there since time in memorial. Service delivery is deteriorating due to self interests of some ‘questionable characters’ and this translates to embezzlement of funds meant for provision of the goods and services. I bet it’s time we demand more accountability in handling of the taxpayers bearing in mind that the cost of living is becoming unbearable.

Another important aspect that taxation clearly brings out is government expenditure. From an economist’s point of view, one should not part with cash unless there is some economic gain. Well, I don’t want to create a notion that the government doesn’t invest in viable projects, NO! I’m of the opinion that more emphasis should be put on development expenditure. This is because we’re kind of loosing track in terms of economic objectives. So much priority and focus is inclined to consumption expenditure e.g. payment of teachers in regards to free primary & secondary education. If after one is done with the 8-4-4 system, cannot make a positive contribution in the economy, investing in such projects is not worth even though we’re working towards attaining the Millennium Development Goals (MDGs) by 2015. Investing more in development expenditure could do the magic in solving most of the problems that we’re currently facing. Same case applies at the personal level, where it’s highly advisable to invest a substantial amount in capital appreciating assets.

Financial management in county governments

With the implementation of the new constitution, we’ll see a lot of changes in the country through the county formation. There will be 47 counties in total whereby the executive authority of each will be vested in the county committee. This basically means that no more districts that had been established earlier under the Provinces and Districts Act, 1992.

Introduction of counties will ensure that the potential of that particular county is replicated to boost its economy and for the benefit of people residing within these counties. It might sound quite complicated on just how will the counties be of importance to the people at the grassroots.

Kenya is a rich country in terms of the most vital factors of production i.e. labour which is really readily available, land which is unfortunately turning out to be scarce due to selfish interests of certain social classes and finally capital which  has proved hard to access due to the effects of the trade/business cycles.

Counties tend to take the form a company in the light of Corporate Social Responsibility (CRS) whereby the company has to give back to the community in one way or another e.g. through participating in community based activities (sports). This implies that, the total income generated in a county will be reinvested into it for its betterment. This is where the essence of financial management comes in handy.

Financial management in its simplest form is the science of managing finances in order to realize positive and realistic cash flows. Over the years, companies from very rich counties have remained dormant due to weaknesses in the corporate governance. All of this narrows down to poor management of ‘everything’ from finances to human resource. Embezzlement of funds and mismanagement remains a major hiccup for reasons well know but ignored by many i.e. INCOMPETENCE. Apparently, those charged with the responsibility of running the companies were employed through dubious means and can hardly deliver due their high levels of incompetence.

To succeed one has to make a perfect blend of the 4 factors of production. If at all the counties will have some success story at one point in time, the foundation laid has to be strong. In this regard, the representatives in the county committee should be competent enough so as to ensure that there is transparency in circulation of funds throughout the county.

Kenya experiences agricultural goods economic growth bias i.e. we invest more in agricultural goods than we do in capital goods. If agricultural activities are paralyzed, that will have an adverse effect on the country’s Gross Domestic Product as well as the attainment of Vision 2030. For this reason, it is essential to efficiently manage what is at the disposal of a county in terms of finance. To link all the counties and to ensure that they working towards a common goal, investing in infrastructure should be made a priority as it will ensure that there is free movement of products to the markets and free flow of information.

Inflation and the ordinary Kenya

It’s been on the dailies and all over social media. So let’s get things straight by having a sneak preview of what ‘inflation’ really is and how it affects the ordinary Kenya a.k.a ordinary wananchi.

Inflation is has been defined by the school of economics as the process of increases in the general/average price level. An increase in the price of a particular good e.g. meat is not inflation. This implies that even when the overall level of prices remains constant some prices will increase while others will decrease in response to changes in supply and demand. Inflation only occurs when the prices of most goods and services in the economy are increasing.

Inflation has various harmful effects. When economists talk of price stability as a macroeconomic objective, they refer to keeping inflation as low as possible. When we judge the performance of the economy we therefore have to look at what is happening to the prices. In so doing, we use the Consumer Price Index (CPI) which acts as a benchmark of the movements in all prices of the products traded in the economy.

The rate of inflation is expected to increase further after hitting a 14.49% mark in June which is a huge shift from the 12.95% quoted in May. The big question at this point in time, is who really benefits? The basic rule is that inflation benefits debtors at the expense of creditors e.g. the government vs. the public. In such a case the government is the debtor (borrower) which raises its revenue through the debt and as well as through tax remittances e.g. Value Added Tax (VAT).  Increase in inflation means a reduction in the consumer’s disposable income and for this reason consumers demand a rise in the wage rates. In taxation, the more income you earn the more taxes you’ll pay and this generally means that the government will keep benefiting from increased revenue from taxes.

Inflation has proved to be a game changer in the recent past as we’ve seen the efforts of entrepreneurs being diverted from innovation and risk taking to anticipating inflation. Normally, inflation stimulates speculative practices that don’t add value to the country’s productive capacity. People try in as much as they can to outwit the others by speculating in shares, property (real estate), foreign currencies and other existing assets which have a good chance of at least maintaining their real value during inflation.

A picture of the food market

From an economist point of view, inflation increases the cost of export industries as well as import-competing industries. For instance, if inflation in Kenya is higher than that of her trading partners and international competitors, the result will be a loss of international competitiveness. This will in the short-run be compensated by a depreciation of the Kenyan currency against foreign currencies and such depreciation will result into a rise in the cost of imported goods. This has been a reality in the country as we’ve seen local producers unable to meet the market demand for flour products. This has forced the country to embark on serious wheat importation. This clearly explains why flour will continue retailing at highs of 150/= per 2kg packet despite the fact that averagely most people still live below the poverty line. But for those residing in up-country a.k.a ocha have come up with ways to try and ease up the burden of ‘coughing’ ksh.150 for a 2kg packet that won’t last for long. People from such areas have found ‘posho mills’ a way forward as it is cost effective and easy to survive by. Many have been forced to change their diets by either reducing the initial intake amount while some even go hungry as the cost of basic commodities has gotten out of hand.

During times of high inflation levels, consumers tend to go for affordability and not quality. An average Kenyan wants a retail outlet that will enable s/he manage the little income that they have because budgeting has become a quite complicated affair.

From a social perspective, price increases makes people unhappy and different groups in the society start blaming one another for increases in the cost of living. Rents, service charges, fares e.t.c have been increasing and frustrations from such fuels social and political unrest. Thus inflation will remain a Public Enemy Number One.

The implications of a weak Kenyan Shilling.

You’ve heard of it all over the news and in those social joints that some of us if not all check into. Companies and individuals have been complaining on how much their businesses are affected by the weakening shilling, while others are smiling all the way to the bank.

A weaker shilling is sort of an advantage to the exporters e.g. those in the business of coffee and tea processing. But the biggest question is ‘just how long will they enjoy the super normal profits?’ well, it might not be for a long a time because these companies are also incurring other costs in terms of processing, packaging and also human resource remuneration. Processing requires state of the art machinery which needs to be regularly serviced to ensure that quality helps the firm stay ahead of its competitors. As we all know, fuel prices have proved to have a multiplier effect in most economies. Skyrocketing fuel prices have remained a hiccup to most companies because as the prices increase, the maintenance costs of the machineries also increases.

Talking of human resource remuneration, the situation at the ground has forced many Kenyans to live hand to mouth and no money can be saved for speculative or transactive motive. It has been argued by the economics gurus that investments are a function of interest rate. Whereby, with an increase in the interest rates people will find it expensive to borrow from the financial institutions and this basically means that the demand for money to meet speculative motive will reduce and vice versa. This is quite related to the trends currently prevailing in the stock market, with trading volumes reducing as investors shy away. Remuneration is a very powerful motivation factor as it makes employees feel that the management is concerned about them. Recently, COTU Sec. General Francis Atwoli proposed an increasing in the wage rate in a bid to help the ‘ordinary mwananchi’ survive as the cost of living seems to get out of hand. The bottom-line is; in as much as exporting companies continue to benefit from the weakening shilling, there are other inevitable costs that will soon or later consume the realized profits.

On the other hand, a weaker shilling is disadvantageous to the importers. Kenya imports a lot of stuff ranging from wheat, petroleum products, machinery, medicines etcetera.  It is disadvantageous in the sense that, one has to pay more due to the increased demand for the dollar or any other convertible currency. A question that could linger in the minds of many is ‘what really makes the Kenyan currency depreciate?’ well, it’s more of economics whereby the price of one currency in terms of another is dictated by the forces of demand and supply of goods from those countries. For instance, if Kenya is importing a lot from say Japan/USA i.e. there is higher demand for products from these countries their currencies will appreciate while those of their trading partners (Kenya) will depreciate.

It’s evident from all circumstances that the disadvantages outweigh the advantages and the big question is ‘what needs to be done to strengthen the shilling?’ There are a lot of things that can be done but then again at times our opinion doesn’t count since we’ve got a Monetary Policy Committee (MPC) with different perception. A lot has been done using the monetary policy tools i.e. the bank/interest rates, open market operations and reserve margin requirement. My opinion is that the MPC should ensure that other monetary policy tools are put into their fullest use e.g. selective credit control, direct control and moral persuasion. Nevertheless, in applying all the monetary policy tools it’s always good to consider their effectiveness and efficiency in meeting the key monetary objectives i.e. price stability, economic growth, full employment, exchange rate stability, and neutrality of money. NB:// monetary policy tools cannot work in isolation but have to be used together with fiscal policy.

What do you think…? feel free to share your sentiments