Kenyan Famine: What Really Happened?
The news that northern areas of Kenya were suffering famine came as a surprise to analysts on many fronts. Kenya is seen as a stable East African growth economy and Nairobi, its capital, is seen as a financial hub for the region. Kenya has a history of being an early adopter of agricultural technologies, from irrigation strategies to genetically-improved seeds. The Kenyan government invested heavily in the late 1990’s in food security and most experts agree these investments paid off, spurring a wave of private investment in agriculture. For instance, Kenya Seed (www.kenyaseed.com) is half a century old, but grew at double-digit rates for the past ten years; it now produces enough high-quality improved seed to supply regions of Uganda, Sudan, and Tanzania.
As an economist who analyses the region’s agricultural output, I was surprised to see Kenya hit so hard. Though I’d seen violent and unusual weather in northern Uganda, and seen production estimates adjusted downward from Malawi to Somalia, the shortfalls in Kenya were unprecedented.
Why did this happen? Surely weather conditions couldn’t account for 100% of the variance. So what were the other factors? And why was massive food aid calculated to be needed even before domestic supplies were exhausted – what happened to Kenya’s food reserves?
The Kenyan shilling is a strong regional currency and a weak global currency – similar to the yen in the 1970’s. Against the Ugandan shilling, for instance, the Kenyan shilling has appreciated almost 7% and trades similarly to the Ugandan shilling against major commodities. But, against global metrics, the Kenyan shilling has inflated over 30% in less than a year, and over 35% by some estimates (estimates vary primarily due to small differences in reference rates and parity calculations). Against the Australian dollar, the Kenyan shilling has lost more than half its value. Though this 35% number is worrying, the actual buying power of the Kenyan shilling is even less impressive against the big commodities: when one compares an 18-month window of shilling movement against standard metrics for oil and food in dollar-denominated increments, the shilling comes close to a 50% purchasing power reduction. Against 24-month median shipping (relevant, as a quarter of Kenyan GDP is tied to the port of Mombasa) discounted against (delta weekly median) benchmark crude, the Kenyan shilling lost close to 40% of its value.
Kenya, before the current inflation problem, strengthened from being a net importer to being a net exporter of many commodities, including foodstuffs. With the spike in food prices, food that would normally have been stored was sold overseas. Major purchases by Kenya’s government tend to be dollar-denominated commodities (oil) or contracts (aircraft). In countries with an import/export ratio of close to 1 (the World Bank used to call these "weak net exporters"), the currency question can (and often is) enough to tip the scales. The worst thing to do in this situation (and the standard policy manoeuvre in Kenya's neighbourhood) is to claim a quick fix is possible and start up the presses and start printing both currency and short-term debt. The problem is that creditors (China, for instance) will demand dollar-denominated debt, which means you're paying your bills in hard currency that consistently outperforms your own. This, in turn, strengthens the temptation to sell whatever will bring hard currency - including, in the current commodity climate, one’s food reserves.
This is, I theorise, the starting point for the 2011 food crisis in Kenya. Once the food was sold to meet dollar-denominated debt obligations, it was impossible to buy food to replace the food that had been sold. Though the Kenyan currency is regionally strong (an attribute the government had no doubt counted on), the entire region suffered a drought that meant food would have to be bought from outside the region, in dollars the Kenyan government either didn’t have or wasn’t willing to spend. To cover the short-term shortfall, it began printing bonds, but couldn’t raise enough hard currency capital. Without food reserves and realising that any effort to backfill reserves by buying food at rising market prices would sink the country further into debt and jeopardise its already-wounded currency, the Kenyan government resorted to international aid and declared a state of emergency.
The result of this crisis is a famine sweeping the region and endangering a generation. But the cause of this crisis has little to do with agriculture and everything to do with macroeconomic mismanagement.
