‘Shilling anchored on shaky ground,’ Parliamentary Budget Office says

The Parliamentary Budget Office (PBO) has cast doubts into the stability of the Kenyan shilling, terming its current anchorage on diaspora remittances as unsustainable.

Tasked with the independence analysis of the state’s budget cycle and fiscal policy, the office describes remittances as “hot money” pointing to their potential for inconsistency in flow.

“Remittances give a sense of a false calm. The source can dry up and present us with a big challenge. Remittances may be here today, gone tomorrow,” PBO Head of Macro-Economic Analysis Millicent Makina said.

Makina spoke during the joint breakdown of the 2019 Budget Policy Statement (BPS) by the Kenya Private Sector Alliance (KEPSA) in conjunction with the KPMG auditing firm.

The PBO has further pointed to the potential under-performance of the Kenyan economy, whose growth rate is expected to come in at an average of 6.1 percent for 12 months to December 31, 2018 poking holes at the effectiveness of the 4-pillar development agenda by government.

According to the office, the projected 6.1 percent growth in Gross Domestic Product (GDP) has been achieved through chance rather than on specific interventions by the state.

This as the return of improved weather conditions stands out as the central reason for the rebound in growth from the 4.9 percent GDP improvement recorded in 2017.

Remittances as an anchor to the shilling have grown cumulatively to Ksh.273.8 billion in 12 months to January 2019 from Ksh.201.7 billion over a similar period in 2018 to hold down the Kenyan shilling at an exchange rate of 100.2 shillings versus the US dollar as per the latest data from the Central Bank of Kenya (CBK)

However, diaspora flows as an anchor to the valuation of the shilling remains a subject of contention among various quarters.

According to Standard Chartered Bank Chief Economist for Africa and the Middle East Razia Khan, remittances are set to remain a central instrument to the management of the macro-economic conditions in the country as given their counter-cyclical attributes.

“Kenyans abroad will likely be sending money to their families back home regardless of the changing circumstances. On the other hand, other forms of financing maybe vulnerable to changing global financial conditions. Remittances have an important counter-cyclical effect; they tend to be very sticky and are growing in importance as the technology makes it cheaper to send funds back home,” she said.

The National Treasury expects the shilling to hold steady at the prevailing exchange rate with Cabinet Secretary Henry Rotich describing the outlook of the shilling as ‘stable’ in his recent assessment of the local currency.

Real concerns do however stem from inflation and the local scene’s investments potential as the private sector remains strangled by the continued hold of interest rate caps on commercial banks lending.

With the Organization of Petroleum Exporting Countries (OPEC) planning for a cut in output in 2019, coupled with US sanctions on the Venezuelan oil and gas industry, inflation could be on the rise once more to threaten the Medium Term Plan set range of 2.5 to 7.5 percent by the National Treasury.

Kenya’s inflation rate currently stands at 4.7 percent for the month of January supported largely by the near free fall of crude prices in the international market.

Meanwhile, private sector credit remains depressed having fallen to 2.4 percent in December from 3 percent in November according to the latest data compiled by the CBK.