Kenya blames FDI slump for trailing economy

The Central Bank of Kenya (CBK) is attributing Kenya’s loss of competitiveness compared to its East African counterparts to a lag in foreign direct investment (FDI). Comparative data published by CBK for Kenya, Uganda, and Tanzania revealed a consistent deterioration in Kenya’s position across various measures and ratios, including the current account, exports-to-GDP, travel receipts, FDI, and debt service.

One key factor contributing to the relative decline of Kenya is the weakening of its currency, the shilling, against the currencies of Uganda and Tanzania. Stable currencies in Uganda and Tanzania have attracted foreign investors who consider currency stability when investing capital. This year, the Kenyan shilling has depreciated significantly against these currencies and the dollar, affecting the country’s competitiveness.

CBK Governor Kamau Thugge highlighted several challenges contributing to the weakening of the shilling, including declining levels of exports to GDP, lower tourism receipts compared to neighbouring countries, a decline in FDI, and increasing debt service costs. Kenya’s debt service costs are notably higher than those of Uganda and Tanzania. The governor also raised concerns about the management of the currency by his predecessor, suggesting that the shilling was artificially propped up using forex reserves between 2020 and 2022.

The ratios of exports of goods to GDP, travel receipts as a percentage of GDP, and FDI to GDP were used for a fair comparison relative to the size of each country’s economy. Kenya’s ratios have consistently declined, indicating a loss of competitiveness compared to its peers.

Additionally, Kenya’s reliance on external loans to finance its current account deficit poses challenges, as these loans strain the currency. In contrast, Uganda and Tanzania are financing their current account deficits with foreign direct investment.

Overall, the CBK is using this data to support its position that Kenya has been losing competitiveness, and the combination of factors such as declining exports, lower tourism receipts, and increased debt service costs has contributed to the weakening of the shilling. The central bank recently raised the Central Bank Rate in response to concerns about the depreciation of the shilling.