How banks are manipulating shilling to gain

The shilling has been the subject of a “financial terrorists” attack, causing it to depreciate against the major global currencies.

Central Bank of Kenya (CBK) governor Prof Njuguna Ndung’u blames four unnamed banks for exerting speculative pressures on the exchange rate.

Currency manipulation is a serious matter that is no different to any other terrorist attack that could cause a lot of suffering to Kenyans. The 1997 Asia financial crisis which impoverished millions of people was caused by institutional currency speculators deliberately manipulating the market. After the Malaysian government froze trading in the ringgit in September 1998, the then Prime Minister Dr Mohammad Mahathir described the currency speculators as “gangrenous leg” that should be chopped off”. Currency speculators take advantage of the flaws inherent in the global financial system.

Know their game

They are very knowledgeable about financial markets and they use this knowledge to “attack” currencies so as to bring its value down and make huge profits. When they collude as these banks are alleged to have done, they can cause a lot of damage to an economy.

While the CBK could counter such attacks to keep exchange rates within reasonable levels, a continuous attack can be difficult for the central bank to match. This is because speculators can take on huge leveraged positions while the central bank would need large amounts of its foreign reserves to counter this. Inability to match the speculators would only cause the exchange rate to plunge further.

So how do they do it? The whole process starts with what is commonly referred to as “shorting a currency”. Shorting means borrowing and selling currencies that you do not own. In contrast with going long-term, you profit in a short trade if the price of a pair gets cheaper.

Here, you buy back the currencies that you initially sold at a lower price. You then return these to the person you had borrowed from. The difference between the price sold and how much you bought the back for is your profit. Confused? Here is a practical example.

Let us assume an initial exchange rate between three currencies, say, the shilling, dollar and euro as follows; Shilling exchange rate is 90 and 128 to one dollar and euro respectively. The euro/dollar cross currency exchange rate is thus 1.4222 (128/90).These exchange rates are in equilibrium since no one can make profit by just trading between the three currencies. If one starts with a dollar, exchanges it into euro, then changes the euro into shilling and then back into US dollar, he would end up with exactly a dollar again.

Now assume that the “shorting” of the shilling by the speculators pushes the exchange rate to Sh 95 per US dollar. By attacking the currency this way, the traders will make two types of profits: first speculative and second arbitrage profits.

Speculative profit comes from betting that a currency would appreciate or depreciate. In our example above, speculative profit is made as follows. First, the traders or the commercial banks sell short Sh90 million at the initial exchange rate of 90 per dollar. This equals $1 million and would be credited to their account. Assume now that the “sell attack” caused the shilling to depreciate to 95 per dollar. Now at this new exchange rate the Sh90 million is worth only $0.947 million. Because this attack caused the shilling to depreciate, it would only require $0.947 million and not $1 million for them to buy back the Sh90 million. They would therefore close their position by buying back the Sh90 million at this new rate and makes a handsome profit of $52,631.58. The profit does not end there though. There is another profit to be made — the arbitrage profit.

Earning profits

Arbitrage profit is made from the mispricing among the exchange rates. An arbitrageur buys currency B spending A, then buys C spending B and lastly returns to A selling C, earning a profit in the process. The chance of profit is maximised by trading with higher amounts. This mispricing happened when the speculators moved the shilling’s exchange rate from Sh90 to Sh95 to the US dollar. In the above example, this is how the arbitrage profit would be made:

First, the trader will borrow $1 million and exchange it into Sh95 million at the new prevailing exchange rate of Sh95 per US dollar. Second, the trader will exchange the Sh95 million into 742,187.50 euros (at the exchange rate of Sh128 per euro). Third, the trader will then exchange the 742,187.50 euros into $1,055,555.56 (at the exchange rate of $1.4222 per euro) and finally they will return back the loan of $1 million, and keep the remaining $55,555.56 as arbitrage profit.

The total speculative and arbitrage profits from nowhere will thus equal 52,631.58 + 55,555.56 = $108,187.13. Although I have used small amounts to simplify the process, currency traders, however, trade in billions of shillings. You can imagine the amount of profits they made during the week 9-16 June in which according to CBK there had been an outflow of $237 million.

A low interest rate regime can help boost the Kenyan economy

As the Word Bank predicts, Kenya may have to navigate through another economic storm this year. Real gross domestic product (GDP) growth projections for 2011 have been revised downwards from 5.7 per cent to 4.2 per cent by the Finance minister and from 5.3 per cent to 4.8 per cent by the World Bank.

Real GDP growth rates through the global economic downturn to date demonstrate the Kenyan economy’s resilience against global economic trends. However, a drought resilient economy would be something. The Kenyan economy is highly dependent on agriculture and there is uncertainty as to the levels of rainfall expected this year.

The consumer price index rose by 10.1 points from 109.38 at the end of 2010 to 119.48 at the end of May 2011. During the same period, inflation went up from 4.08 per cent to over 12 per cent, mainly driven up by rising fuel and food prices. This had a significant negative impact on the purchasing power of the spending middle class.

During the same period, the average yield rate for the 91-day Treasury bills, which is a benchmark for the general trend of interest rates, rose from 2.276 per cent to 6.409 per cent. This upward trend is an indication of the government’s need for cash and is the only way to attract domestic funds.

This may be aimed at reducing money supply, reducing effective demand and thereby curbing inflation, but it may not work because it does not address the factors driving the cost push inflation like high cost of manufacturing due to high electricity costs, very high fuel prices etc. We should, therefore, have a low interest rate regime as this will increase disposable income and expand trade.

High cost

The shilling also reached a new low against the US dollar. This will adversely affect trade by making imports, some of them inputs into production, very expensive and further pushing up retail prices.

Further, we are approaching an election year in 2012 and as usual, there is a high degree of political uncertainty. If the past is anything to go by, we can assume that it is around that time when foreign investors refrain and even divest, demand for the Kenya shilling goes down and it worsens against the major currencies, supply and trade contract and the business community generally grows tense.

From lack of funding, lack of rainfall, political uncertainty and instability leading to post-election violence, the global economic downturn, high cost of electricity, rising oil prices, costly imports, packed technology and such like, there seems to be too many loose ends which frustrate this strategy, resulting in a zig zag, start stop trend in growth.

It is a delicate balance that needs to be carefully watched because for the economy to expand consistently at a high rate, government spending must continue in infrastructure, energy, healthcare, education and agriculture, and all the while maintaining macro-economic stability.

Kenya and economic turbulence: Time to prepare, not panic

The world is in turmoil.  The combination of the Japanese earthquake, tsunami and nuclear crisis, the conflict in Libya and the European debt crisis, may change the way we look at the world.


The perspective of developing countries is different. They appear to be a beacon of stability in these turbulent times.  Africa is set to grow again by more than 5 percent in 2011--for the 7th time in 8 years.

No doubt Africa and other developing countries will be affected by this global turbulence which once again originated in richer economies.  Kenya is a case in point.  Since the end of 2010 inflation has doubled (although from a low base), the shilling has weakened to its lowest level in 15 years, and the stock market index declined by 10 percent.  Many observers are asking if Kenya facing another episode of economic turmoil similar to 2008-09.

Ragnar Gudmundsson from the IMF  that this need not be the case for two main reasons.  First, since 2010 a new growth momentum has been building, aided by structural reforms, the new constitution, and a dynamic private sector.  Second, Kenya has a strong track record of economic policymaking that has helped it to navigate previous shocks and leaves it well positioned to pass through this storm as well.

The external shocks are real. Food prices have risen but from a lower base because of a good harvest in 2010. More importantly, the rapid increase in oil prices has hit Kenya’s external position.  In 2010, the oil price averaged US$ 80 per barrel; by mid-March it reached US$ 115 per barrel.  Oil represents almost a quarter of Kenya’s total imports and, according to simulations by my colleague John Randa, $100 per barrel oil will widen the current account deficit by an additional 2 percent (see figure 1)*. 

The increase in food and fuel prices led to rising inflation which almost reached 10 percent in March 2011. This is double the end-2010 level but substantially lower than 2008/09 (see figure 2).

FIGURE 1: Kenya’s Balance of Payments deteriorates with higher oil prices 
Source: Central Bank of Kenya, World Bank estimates

Figure 2: Kenya’s inflation: Down and up
Source: Kenya National Bureau of Statistics

In the past Kenya has managed external shocks well, especially the global financial crisis. This time should be no different. There are  four things the government can do to prepare:
First, stand ready to tighten monetary policy further if inflationary pressures persist. It is important to signal Kenya’s commitment to preserve the hard-won gains of low inflation and price stability.

Second, keep the fiscal deficit within current targets. Though still low by international standards, Kenya’s public debt-to-GDP ratio increased from 35 percent in 2007 to almost 50 percent today. The time has come to start rebuilding the buffers that served the country so well in the past two years.

Third, enhance export competitiveness. The best way to start making Kenya more competitive is to modernize the port of Mombasa, East Africa’s most important infrastructure asset.

Fourth, use cash rather than food in responding to food shortages. Kenya can learn many lessons from the 2009 food crisis, including attempts to control food prices that resulted in subsidies going to the rich, while creating opportunities for corruption. By contrast, many countries have successfully implemented cash transfer programs when food prices spiked. Given Kenya's success with 'mobile money', this seems a more effective approach and one that would also help to build a more robust social protection system.

Structural Issues in kenya's economy

Private Sector Development

In 2010, the World Bank Doing Business report ranked Kenya 98^th out of 183 economies in the "Ease of doing business", three places below its 2009 ranking. Poor infrastructure, political risk, finding the right quality of staff, and access to adequate credit and financing were among the major constraints faced by small and medium enterprises (SMEs) in 2010. The government’s Economic Stimulus Programme played an important part in boosting infrastructure projects and creating credit for SMEs. The government streamlined the financial sector by regulating microfinance institutions. The 2010/11 budget included a Business Regulation Bill to prevent the regulatory authorities from setting arbitrary charges and fees. It is meant to address the main constraints faced by businesses and promote growth in the private sector.

The Kenyan banking sector performed well in 2010. Total assets of the banking sector rose by 22.6% between June 2009 and June 2010. Growth in asset base was due to growth in deposits, retained profits and capital injections. From June 2009 to June 2010, non-performing loans decreased by 7.9%, total deposits increased by 27.8%, capital and reserves of the banking sector grew by 25.6%. In the meantime, total capital to risk weighted assets ratio only decreased marginally from 19.8% to 19.6%. The banking sector pre-tax profits increased by 41.9% over the same period.

The good performance of the Kenyan economy and the gradual recovery of the global economy in 2010 contributed to the rebound in trading activities at the Nairobi Stock Exchange (NSE). The NSE 20 share index rose by 55% between September 2009 and October 2010. Market capitalisation increased by 58.3% over the same period. Bond turnover for the year up to November 2010 stood at KES 460 billion compared with the annual turnover of KES 110 billion in 2009, representing a 316% increase.

2010 was dubbed the year of Rights Issue. Up to October 2010, KES 16 billion had been raised through rights issues at the NSE as listed firms raised additional capital. This represented 56% of the total amount raised since 1988, which stands at KES 28 billion. During the year, TPS Serena, Kenya Commercial Bank Group, Standard Chartered Bank and KPLC raised capital through rights issues. TPS Serena raised KES 1.60 billion out of the planned KES 1.18 billion while KCB raised KES 12.50 billion out of the targeted KES 15.00 billion. Standard Chartered Bank raised KES 2.50 billion – more than the target of KES 1.88 billion. The funds were raised to complete the buyout of a planned custodial business from rival Barclays Bank. The bank used the excess proceeds to support its balance sheet.

Other Recent Developments

The 2010/11 budget emphasises agricultural and rural development, in recognition of agriculture’s major contribution to GDP (23%), as well as employment and exports. The strategy’s main objectives are to secure livelihoods in rural areas and ensure food security and employment. The government plans to promote agriculture through improving agro-business, value-addition and market access; increasing access to credit and to affordable inputs; and promoting research and training. Key infrastructure facilities were also given major attention in the 2010/11 budget. The government will continue to scale up investments in transport networks, both roads and ports. and energy supply. The development budget for constructing the road network was allocated KES 78.6 billion. KES 34.1 billion were dedicated to diversifying energy sources mainly through the expansion of the national transmission system and the development of geothermal energy.

The Information and Communication Technologies (ICT) sector is vibrant and has actively contributed to economic growth in recent years. Telkom Kenya is the main fixed line telephone service provider in Kenya. Because of intense competition, the company has diversified to other services including enhanced voice and data services. In 2010, Telkom Kenya had a client base of about 460 000 on both fixed line and CDMA wireless. During the year up to June 2010, the number of fixed lines was 234 522, representing a 5.4% decline compared with the similar period in 2009. In the same period, the number of fixed wireless subscriptions declined by 46.2%. The decline in fixed network subscriptions is an indication of the increased availability of more convenient and affordable mobile phones.

As at the end of June 2010, the penetration of mobile phone services was reported at 51.2 per 100 inhabitants, still below the world average of 67.0 per 100 inhabitants. Mobile phone money transfer service is a Kenyan innovation that has performed outstandingly well over time. Safaricom and Airtel have been the major providers of this service through M-pesa and Zap respectively. Orange Kenya started its money transfer service – Orange Money – in 2010. The mobile phone money service subscribers increased to 7.7 million by December 2009 from 5.5 million by December the previous year. It is estimated that the service had attracted over 13.5 million subscribers by November 2010.

The Internet market continued to expand in 2010. From January to June 2010, there were an estimated 7.8 million Internet users in the country, up from 3.6 million users in the same period of the previous year. The increase in the number of Internet users was mainly attributed to increased access of Internet services through mobile phones. In the first half of 2010, there were 3.1 million Internet subscriptions in the country compared with 1.8 million subscriptions reported over a similar period in 2009, representing a 69.8% increase. The increase in the number of Internet subscriptions continued to be dominated by mobile data. Internet subscriptions through GPRS/EDGE and 3G accounted for 99% of total subscriptions. Orange Kenya was granted a 3G licence by Communications Commission of Kenya in 2010.  The number of subscribers therefore increased because of innovations in Internet access by operators from the standard personal computer to mobile handset and portable broadband Internet modems. The effect of the Seacom cable on Internet prices is lagging as investors recoup their investment before bringing down prices.

Macroeconomic Policy

Fiscal Policy

In 2010, the government continued to implement its economic stimulus programme, funding public projects in agriculture, services, infrastructure, health and education as well as various community-based initiatives through the Constituency Development Fund and Group funds (Youth and Women fund). To mitigate the impact of multiple shocks, the government eased its macroeconomic policies. The deficit of the primary balance increased from 3% of GDP for the fiscal year 2008/09 to 3.2% in 2009/10. It is expected to deteriorate further down to a deficit of 4.1% of GDP for fiscal year 2010/11. The overall deficit also grew from 5.4% of GDP in 2008/09 to 5.8% in 2009/10 and is forecast to increase to 6.8% in 2010/11.

Total revenue collection and grants increased to 24.9% of GDP in the fiscal year 2009/10, from 23.3% of GDP in 2008/09. Government total expenditure and net lending followed the same path, increasing from 28.7% of GDP in 2008/09 to 30.8% of GDP in 2009/10. Total government expenditure for the fiscal year 2009/10 increased by 21.7% amounting to KES 725.2 billion, against a target of KES 791.4 billion. The shortfall was attributed to lower absorption in both recurrent and development expenditures by the ministries. On the one hand, recurrent expenditure amounted to KES 510.5 billion, against a target of KES 536.3 billion, therefore representing a 95% execution rate. The lower-than-targeted recurrent expenditures mainly emanated from the operations and maintenance expenditures. On the other hand, development expenditures were executed at 84% compared with the target.

Cumulative external financing at the end of the 2009/10 fiscal year represented a net borrowing of KES 22.4 billion compared with KES 11.7 billion in 2008/09. Total disbursements including appropriations in aid amounted to KES 39.8 billion against a target of KES 66.5 billion. Public debt increased from KES 1 075.7 billion by the end of September 2009 to KES 1 294.4 billion by the end of September 2010.

From January to September 2010, domestic debt increased by 28% compared with a similar period in 2009. The stock of Treasury bills increased by 5.8% while Treasury bonds increased by 24.5%. External public debt increased from KES 525.5 billion in December 2009 to KES 589.7 billion in September 2010. The Fitch Rating for 2010 remained B+ for long-term foreign debt, B for short-term foreign debt and BB- for domestic long-term foreign debt.

Cumulative debt service payments to external agencies as of the end of September 2010 amounted to KES 8.6 billion: 81.2% in principal and 18.8% in interest. For the first quarter of the fiscal year 2010/11, government expenditure on interest and other charges on domestic debt increased to KES 16.2 billion from KES 14.1 billion in the first quarter of the fiscal year 2009/10. For the current fiscal year 2010/11, budget estimates are that government domestic borrowing will amount to 3.8% of GDP while external borrowing shall account for 3.0% of GDP. Gross domestic debt-to-GDP ratio is projected to increase from 24.2% in June 2010 to 27.1% in June 2011.

For the fiscal year 2010/11, the government plans to contain the increase in expenditures through improved public financial management while maintaining strong revenue collection. In addition, the composition of expenditures will be shifted from recurrent to capital expenditures. For 2010/11, total government revenues and grant should represent 24.5% of GDP. Overall expenditures are projected at 31.3% of GDP. The overall recurrent expenditures are targeted at 21.3% of GDP, an increase from 20.9% of GDP recorded in fiscal year 2009/10. Current expenditures are projected at 21.9% of GDP, compared to 20.3% of GDP in 2009/10. Additional expenditures are targeted at supporting infrastructure by reducing the cost of doing business and encouraging private sector investment.

The overall fiscal deficit (after grants) is expected to worsen from the equivalent of 5.8% of GDP in 2009/10 to 6.8% of GDP in 2010/11. The government plans to cover it by net external financing of 3% of GDP and domestic borrowing of 3.8% of GDP, including domestic infrastructure bonds on 1.1% of GDP. Over the medium term, the government expects to take the fiscal deficit down to about 5% of the GDP and to bring the debt-to-GDP ratio towards 45%. The debt management strategy will aim to diversify sources of financing by emphasising long term maturities and concessional loans.

Table 4: Public finances (percentage of GDP)

	2002	2007	2008	2009	2010	2011	2012
Total revenue and grants	19.8	22.5	23.4	23.3	24.9	24.5	23.7
Tax revenue	17.7	19.6	20.4	20.7	21.3	21.1	20.8
Oil revenue	0	0	0	0	0	0	0
Grants	0.7	0.9	1.3	0.8	1.3	1.2	0.8
Other revenues	1.5	2	1.7	1.8	2.4	2.2	2.1
Total expenditure and net lending (a)	22	23.4	28.6	28.7	30.8	31.3	30.7
Current expenditure	19.3	18.7	21.8	21.2	20.3	21.9	21.2
Excluding interest	16.3	16.2	19.3	18.8	17.7	19.1	18.8
Wages and salaries	7.6	7.4	7.5	7.1	7	7	6.7
Goods and services	4.4	5.8	8.2	7.9	7.2	8.3	8.3
Interest	3	2.5	2.5	2.4	2.6	2.7	2.4
Capital expenditure	2.6	4.7	6.7	7.4	10.3	9.4	9.4
Primary balance	0.8	1.6	-2.7	-3	-3.2	-4.1	-4.7
Overall balance	-2.2	-0.8	-5.2	-5.4	-5.8	-6.8	-7.1

a. Only major items are reported.
Source: Data from Kenya Central Bureau of Statistics (KNBS) and Ministry of Finance; estimates (e) and projections (p) based on authors' calculations.
Fiscal year July (n-1)/June (n).

Figures for 2010 are estimates; for 2011 and later are projections.

http://dx.doi.org/10.1787/888932409462

Monetary Policy

The Central Bank of Kenya (CBK) implemented flexible monetary policy in 2010. It aimed to keep inflation low by setting an inflation target of 5%, ensuring stable long-term interest rates and competitive exchange rates. It supported the economic activity by facilitating the private sector access to credit. The CBK has cut the Central Bank Rate (CBR) four times, amounting to a total reduction of 100 basis points in 2010, from 7% in January to 6% in July 2010. In addition, the CBK reduced the Cash Reserve Ratio from 6 to 5% in the first half of 2010.

By implementing these measures, the government expects to revive lending and stimulate the economy through increased consumer consumption. This monetary stimulus has been successful and resulted in increased access to credit for the private sector as well as recovered consumption growth. The credit allocated to the private sector grew dramatically, registering a 17% increase in the first half of 2010. The major part of this growing credit was captured by credit to households, which grew by 30% over the same period.

The CBK introduced agency banking in 2010 to deepen access to financing for a majority of Kenyan small entrepreneurs and to reduce the high cost of financial services. Under the Guideline on Agent Banking enacted in May 2010, banks are allowed to conduct banking business through third party agents such as petrol stations, shops, telecom companies, chemists and sole proprietors. However, services delivered by these entities exclude customer appraisal and loan approval. Information asymmetry between borrowers and banks is another factor contributing to the high premiums charged by banks. To reduce information asymmetries and promote cheaper credit, the CBK has created a credit information-sharing mechanism. The first Credit Reference Bureau was licensed in February 2010.

As a result of strong and prudent macroeconomic management combined with a favourable conjuncture (slowing international oil prices and better food supplies), inflation dramatically decreased to 3.1% in October 2010 from a high of 19.5% in November 2008. Kenya achieved its lowest inflation performance since 2003, posting a consumer price index inflation rate of 4.1% for 2010. For 2011, the CBK will target a low inflation rate of 5% and stable interest rates. To achieve these objectives, it will need to tackle inflationary pressures arising from the rebounding economic activity as well as accelerated government spending.

Throughout 2010, the Kenyan shilling depreciated against the dollar and appreciated against the euro during the first half of 2010. For 2011, the CBK aims to ensure a competitive exchange rate that should promote private sector development.

External Position

The main exports in the first half of 2010 were tea (23.6%), horticulture (14.5%), manufactured goods (12%), raw materials (4.4%), coffee (3.9%) and oil products (2.2%). Improved commodity prices in the international markets and growing domestic production led to an increase in the value of merchandise exports of 8.4% between August 2009 and August 2010. This increase was mainly attributed to tea exports whose value increased by 37.5%. Over the same period, receipts from other exports also increased. Horticultural exports increased from USD 673 million to USD 709 million. Oil products exports increased by 21.7% from USD 91 million in August 2009 to USD 110 million in August 2010.

Almost half (46%) of Kenya’s exports for the year up to August 2010 went to African countries. The main destinations for exports were Uganda (12.4%), Tanzania (8.4%), Egypt (4.5%) and Sudan (4.3%). Outside Africa, Kenya mainly exported to United Kingdom (UK) (10.7%), Netherlands (6.9%), United States (US) (4.5%), Pakistan (4.5%), and United Arab Emirates (UAE) (4.4%).

The increased value of imported oil and manufactured goods raised the value of imports by 10.1% during the first half of 2010 compared to the first half of 2009. Oil imports increased by 23.6%; manufactured goods imports increased by 20% and imports of machinery and transport equipment increased by 10.8%. During the third quarter of 2010, Kenya sourced most of its imports from Far East Asia, whose share of imports accounted for 42% of the total import bill as well as from the European Union and Middle East Asia, which shares of imports respectively amounted to 20.4% and 14.7% of the import bill. 

Kenya imports crude oil and refines it for domestic use and for export. In the last five years, the quantity of imported petroleum products has grown from 3.5 million tonnes in 2004 to 4.7 million tonnes in 2009. On the other hand, the export of petroleum products increased from 37 400 tonnes in 2004 to 216 100 tonnes in 2007, fell again to 88 700 tonnes in 2008, but increased to 112 500 tonnes in 2009.

The services current account deficit improved to USD 1 787 million in the year to August 2010 from USD 1 966 million in the year to August 2009. Earnings from tourism and transportation services are the main sources of this improvement. Increased value of Kenya’s imports contributed to worsening its merchandise account deficit from a deficit of USD 5 842 million in the year to August 2009 to a deficit of USD 6 509 million in the year to August 2010. As a result, the current account deficit increased from 5.3% of GDP in 2009 to 7.8% of GDP in 2010.

The main sources of foreign direct investment (FDI) were Australia (KES 16 billion), Israel (KES 4 billion), the UK (KES 738 million) and India (KES 434.3 million). On external grants, commitments amounting to KES 40.4 billion have been received for the fiscal year 2010/11. Remittances flows for 2010 are estimated at USD 642 million, from USD 609 million in 2009. These flows to Kenya are a critical source of foreign currency even if the remittances are mostly used to pay for daily needs.

Table 5: Current account (percentage of GDP)

	2002	2007	2008	2009	2010	2011	2012
Trade balance	-7.6	-15.7	-18.8	-19.5	-20.9	-21.5	-21.1
Exports of goods (f.o.b.)	16.5	15.2	16.8	15.2	16.4	17	16.8
Imports of goods (f.o.b.)	24.1	30.9	35.6	34.7	37.2	38.5	37.9
Services	2.6	4.6	4.6	6.6	5.4	5.5	5.4
Factor income	-1.1	-0.5	-0.2	-0.2	0	-0.1	-0.1
Current transfers	5.2	7.8	7.8	7.8	7.8	7.6	6.7
Current account balance	-0.9	-3.8	-6.6	-5.3	-7.8	-8.5	-9.1

Source: Data from CBK data; estimates (e) and projections (p) based on authors' calculations.

Figures for 2010 are estimates; for 2011 and later are projections.

The macroeconomic performance of the Kenyan economy

The macroeconomic performance of the Kenyan economy improved significantly in 2010 compared with 2009. While the economy grew by 2.6% in 2009, it is estimated that the growth rate of gross domestic product (GDP) nearly doubled to reach 5.0% in 2010. The increase in growth can be attributed to the good rainfall during 2010 and higher prices for Kenyan exports on world markets. The abundance of agricultural output, coupled with increased competition in some key services, helped contain inflation in 2010. However, the Kenyan economy faces two challenges: diversification and the reduction of its dependence on the vagaries of nature.

The outlook for 2011 is promising and a combination of trends could contribute to ensure positive prospects in the short to medium term. The approval of the constitution, continued investment in infrastructure and government policies targeting development in the private sector should all enhance Kenya’s business environment and reinforce a dynamic private sector. Second, deepening regional integration and the launch of the East African Community common market are creating a single trading and investment environment in which Kenyan firms to have access to a larger market. Last, prudent monetary and fiscal policy is expected to reduce inflation and keep interest rates low, creating a credible and stable macroeconomic environment. Given these prospects, the Kenyan economy is forecast to grow by 5.3% in 2011 and 5.5% in 2012.

This positive outlook may however be subject to two main challenges. First, Kenya will need to reduce its high reliance on agricultural outputs to limit its vulnerability to climate hazards by diversifying the economy. Second, Kenya may be vulnerable to another political shock as it faces 2012 elections. Contributing further to the uncertainty weighing on the political environment is the indictment of six high-level Kenyan officials – including the current finance minister and deputy prime minister – by the International Criminal Court for alleged crimes connected to the 2007 post-election violence.

10 common lies in a typical workplace

• I would be happy to take the assignment. But the truth is that this is the last thing you want to do. Instead of lying tell your boss: "I would be happy to help you with the task, but I need to find out more about what the task entails."
• My alarm clock did not go off. The truth is that you painted the town red last night. Lies on punctuality only work once or twice at most. If you repeatedly use the alarm clock or the traffic jam excuse, then your boss and others will catch on, and you will lose credibility. If you are generally a punctual person and happen be late once in a while, it is best to own up, apologise and promise not to do it again.
• I don’t have any questions. The truth is often that you have not understood the instructions and you don’t want to look stupid by asking for clarifications. And most of the time, the boss can see right through this. Be honest and admit that you are confused and that you will get your questions together and ask them later.
• Everything is under control. Actually, everything is not under control.
Instead of lying be bold and tell your boss: "I seem to have hit a rough patch; can I get your advice?" Admitting weakness and asking for help is a sign of maturity and strength.
• I have just seen your text message now. The truth is that you have been avoiding replying your colleagues or clients. It is much better not to say when you received the message, but just say: "I am responding to your message pronto".
• We shall meet again soon. You have no intention of getting together with that person ever. Instead of following this tired line simply say: "I am glad we had a chance to meet and I hope we shall do more business in future."
• I was thinking along similar lines. You must have said this at a workplace meeting just to appear agreeable. You may try a conciliatory and diplomatic line like: "What will make change happen is creativity in thinking and helping others to see a viable but different perspective."
• Oh yes, I have done that before. The truth is that you have no idea what this project is, or how to do it. If there is no way that you can learn everything you need in a reasonable time frame to do the assignment, be honest and ask for an extension or for the tasks to be transferred to someone else. Doing it is the way to assured failure and falling out with the boss you want to impress.
• I am sick. The truth is that you need a day off to attend to other things. But like the lie of lateness, you can only cheat about sickness only once or twice at most.
• This will only take a few hours. The truth is that the task you are about to embark on to please your boss will take forever. Instead be frank and tell the truth.