Diaspora remittances overtakes tea, coffee, tourism as Kenya’s highest foreign exchange earner

US Dollar

NAIROBI, KENYA: Nearly everything that Kenya has exported is returning less and less value as the economic crisis deepens. But there is an exception: Labour.

Remittances from Kenyans living and working abroad have been getting better. These monies have been a fresh breath of air to a ravaged economy, and have significantly helped to prop up the Shilling.

In recent times, Kenya’s economy has been grappling with myriad headwinds. Early this year, drought disrupted critical economic activities such as production of tea and coffee whose export earnings help replenish the country’s foreign currency coffers. 

Lenders have starved firms and households of credit, stifling sectors such as building and construction, manufacturing and agriculture.

And prolonged electioneering has cast a long shadow of uncertainty, prompting investors to adopt a wait-and-see attitude. Foreign investors at the Nairobi Securities Exchange (NSE) have hurriedly sold and left with their capital, fearing for a repeat of the 2007 post poll violence in which over a thousand lives were lost and properties worth billions destroyed.

Save for the astute hand of Central Bank of Kenya, under the stewardship of Governor Dr Patrick Njoroge who has ruthlessly gone after currency speculators, the Shilling would have lost ground.  

But there has been a saviour.

Diaspora remittances, or money transferred to Kenya from Kenyans abroad, has been coming in thick and fast. They are expected to hit $2.2 billion (around Sh228 billion at current exchange rates) in 2017, a 4.1 per cent growth, according to the latest data from the World Bank.

By August, 2017, the CBK estimates that about Sh166.4 billion was remitted by Kenyans in the diaspora “through formal channels that include commercial banks and other authorised international remittances service providers in Kenya.”

These remittances, some which come through informal means not captured by CBK, might prove critical at a time when growth of key foreign exchange earners such as export of coffee, tea and horticulture have either been slow or sluggish.

Financial analysts are also worried that foreign capital inflows, which have also been important in shoring up the country’s foreign currency reserves, might decline as investors keep away from the political uncertainty that  enveloped the country in the lead up to the October 26, presidential elections.

Third highest recipient

And with heightened political activities in the country, tourism, another important foreign exchange earner, might also take a hit. A local daily last week quoted the Kenya Association of Travel Agents (KATA) saying that air ticket sales dropped Sh5 billion, denting tourism sector’s prospects.

Already there are reports that CBK has been forced to sell US Dollars to stabilise the Shilling, in what appears to be a panic-buy of the greenback by importers ahead of the re-run of presidential elections held on October 26.

This makes Kenya the third highest recipient of diaspora cash after Nigeria ($22.3 billion or Sh2.31 trillion), Senegal ($2.3 billion or Sh238 billion), and Ghana ($2.2 billion or Sh228 billion).

Indeed, Kenya’s foreign exchange reserves fell by $39 million (Sh4.04 billion) last week to $7.373 billion (Sh764.9 billion). This is only enough to cover the country’s import cost for less than four months.

The World Bank noted that formal remittance inflows to Sub-Saharan Africa region are projected to increase by 10 percent from about $34 billion (Sh3.5 trillion) in 2016 to $38 billion (Sh3.9 trillion) in 2017.

“This is partly because of improvement in economic activities in the high-income Organisation for Economic Co-operation and Development (OECD) countries that are the major remittance-sending countries for Sub-Saharan Africa,” read the report, Migration and Remittances published in October 2017.

In bad times, such as the ones Kenya has found itself in, remittances have come through for African countries whose sons and daughters are spread in all corners of the world, eking a living.

Indeed, it is tempting to say that if it was not for remittances, Nigeria situation could probably have been worse, with the country sliding into recession after prices of crude oil, their main source of foreign currencies, tumbled. 

The director of research and policy at Kenya Bankers Association (KBA) Jared Osoro, agrees that, generally, Kenya’s exports have performed poorly, even as remittances have grown. The poor performance of the country’s exports is largely due to “weaker commodity market,” says Osoro.

However, he is concerned that over-reliance on remittances might shift the country’s attention from what should essentially be the main source of country’s foreign exchange earner. “Remittances should not be seen as a substitution for creating a stronger export base,” says Osoro, noting that the country needs to diversify its source of foreign exchange.    

The source of remittance earnings should also be verified, he says. “You can’t say it is remittance earnings despite of the source,” he says, noting there have been studies done, deconstructing the benefits of Diaspora remittances from the ills of brain-drain.

These Kenyans in diaspora would have been here, helping with the local production.

Diaspora remittances is currently Kenya’s highest foreign exchange earner, with US Dollars, Euros, British Sterling Pounds, and many foreign currencies, having overtaken tea, coffee, and tourism.

But even more important, says Johnson Nderi, a corporate finance manager at ABC Capital, is the need to boost our local production if we are to stabilise the Shilling. Nderi does not understand how the country gets to burn a lot of foreign currencies to buy capital goods, mainly petroleum and machinery, and yet this does not result into increased local production. “What are we producing with all that?” wonders Nderi.

He says the country’s weak economic structure is to blame for the invariable weakening of the Shilling. “As we produce more, the Shilling should strengthen,” he explained. The money we get from our local production, says Nderi, can then be used for any foreign obligation.

But now, the environment that would enable optimum local production has been intoxicated by the heightened political activities.  

NASA Presidential candidate Raila Odinga withdrew from the race, citing failure by the electoral commission to put in place measures that will ensure a level playing field. The country found itself here after the Supreme Court nullified the August 8 elections citing illegalities and irregularities in conduct of the presidential polls.  

IMF’s Stand-by facility

It has since been a tense time for the economy, with most economic indicators blinking red. Nderi says that portfolio investment where foreign investors looking to participate in stock market has been affected. “There are more sellers than buyers,” explains Nderi.

The foreigners exiting the stock market, explains Nderi, are converting the money they get into foreign currencies, placing a lot of pressure on the Shilling. “Foreign investors wanting to come in are also postponing their investment in Kenya,” adds Nderi.

If things get thick, the country can always turn to the International Monetary Fund, which is the bank of last resort.

However, it will be difficult for the country to draw from the IMF’s Stand-by facility with the country entitled to Sh300 billion which is strictly supposed to be resorted to in case of an external shock.