More than 70% of Kenya’s employed population and 64% of small to medium-sized enterprises are in the agriculture sector, while 99% of exports are agricultural products.
Allocating only 3% of the budget to agriculture is “the height of confusion”, argues Amana Capital in its half-year update on Kenya’s economy.
Nairobi has allocated KSh59bn ($570m) to agriculture, while shrinking the budget for crop management and development from KSh19bn to KSh17bn.
The government has been “spending on big grand projects and ignoring key sectors that would give their fiscal policy the multiplier effect in growing the real economy,” says Amana Capital.
Banks are following the trend set by the government, “starving” the sector of resources, according to Alexander G. Owino, a consultant with the Route to Food initiative.
Loans and advances to the agricultural sector account for about 3% of commercial banks’ portfolios in Kenya.
They are higher in Kenya’s major trading partner Uganda, at 8.5%.
Kenya and Uganda are running the risk that chronic underinvestment in agricultural may create permanent food deficits that they won’t be able to fix by importing from each other.
Food security
Smallholder farmers produce at least 70% of Kenya’s food. Declining budgetary allocations to agriculture are likely to mean lower food production, growing food insecurity, higher food prices and increased undernourishment, according to Owino.
The crowding-out of Kenyan private sector investment is a key problem, according to a report from Grant Thornton in May.
Kenya’s private-sector contribution to GDP growth is constrained by the government’s cap on the interest rates that banks can charge on loans.
This pushes banks to invest in less risky government securities rather than the real economy. “This is having a direct impact on exports which are not where they need to be while the import bill keeps rising,” says the report.
Amana Capital predicts that Kenya’s external debt service to exports ratio will increase to 47% in 2019 from 40.5% in June 2018.
For every dollar earned in exports, 47 cents will be needed to service debt.
The remaining 53 cents won’t pay for an import bill that is three times higher than export receipts.
Weakening currency
In May, The Africa Report argued that the stability of the shilling indicates that the currency is being managed rather than allowed to float freely.
The government says the currency is free-floating, and that it only intervenes to limit volatility. Weak exports are making that an ever-harder job.
On 25 July, the shilling dropped to 104 against the dollar, its lowest rate in almost two years.
The Economist Intelligence Unit (EIU) predicts the shilling will continue to weaken to an average of 109 to the dollar in 2020, from 102 this year.
Amana Capital sees “a high likelihood” the central bank will finalise negotiations with the IMF for a foreign-exchange standby facility to ease pressure on the shilling. Amana says Kenya’s central bank will continue managing the shilling, but this will come at a cost of continually borrowing in dollars to beef up reserves.
The bottom line: Kenya must look for ways to drive investment to its agriculture sector to promote food security and protect the shilling.
