Shoppers at a supermarket. The Kenya shilling is most properly valued
against the dollar among major currencies in Africa based on ability to
buy goods, a new study says. PHOTO | FILE
By CHARLES MWANIKI, cmwaniki@ke.nationmeda.com
In Summary
- The Kenya shilling is most properly valued against the dollar among major currencies in Africa based on ability to buy goods, a new study says.
- Pan-African market intelligence firm Sagaci Research used the purchasing power of 18 African currencies based on the price of a 12-piece chicken bucket at fast-food chain KFC restaurants, which are present in these countries.
- Kenya’s six KFC outlets price their chicken bucket at an average of $20.60, less than one per cent above the US price of $20.50. This, according to the study, means that the shilling is overvalued by only one per cent in real terms.
The Kenya shilling is most properly valued against
the dollar among major currencies in Africa based on ability to buy
goods, a new study says.
Pan-African market intelligence firm Sagaci Research used
the purchasing power of 18 African currencies based on the price of a
12-piece chicken bucket at fast-food chain KFC restaurants, which are
present in these countries.
The average costs of the same product vary widely
from country to country, indicating a disparity in real and implied
currency exchange rates, the study said.
Kenya’s six KFC outlets price their chicken bucket
at an average of $20.60, less than one per cent above the US price of
$20.50. This, according to the study, means that the shilling is
overvalued by only one per cent in real terms.
Last year, the shilling depreciated by 12.8 per
cent to the dollar, but still outperformed many African currencies that
booked higher levels of depreciation over the period. This year the
shilling has appreciated marginally against the greenback by 0.5 per
cent to exchange at 101.78 units.
“The index illustrates the cost of purchasing final
products by consumers in Africa, home to a rapidly growing middle
class. It enables companies and individuals to draw comparisons between
African countries, as well as other developed markets such as the US and
Europe, and hence assist them in calibrating pricing strategies during
their entry into the African market,” said Sondos Faramawy, research
director at Sagaci.
Elsewhere, the highest prices of KFC chicken in
comparison to US based prices are found in Angola and Nigeria (at $35.20
and $30.10), thus leading to an estimation that their currencies are
overvalued by 72 per cent and 47 per cent respectively.
On the other hand, the lowest prices are found in
Egypt and South Africa, whose currencies are undervalued by 34 and 48
per cent respectively. The semi-annual study, done on February 15, is
similar to the one carried out by UK publication The Economist, which
tests purchasing-power parity (PPP) by comparing the prices of a
McDonalds hamburger (called the Big Mac Index) in different countries
with the US price.
Nominal exchange rate
This is under the notion that in the long run
exchange rates should move towards the rate that would equalise the
prices of an identical basket of goods and services in any two
countries.
Economists have in the past pointed out that the
shilling is overvalued in real terms even as the nominal exchange rate
points to a depreciation in value.
In their recent briefing on the economic outlook for 2016, CfC Stanbic
analysts noted that the interventions seen from the regulator when the
currency started strengthening following its slide to the 106 level last
year are indicative of concern over an overvaluation on trade-weighted
basis.
“The regulator may not admit it, but they are
watching the trade-weighted exchange rate. After going from 106 to 101,
the Central Bank of Kenya started buying dollars from the market. They
may not want the currency appreciating too much on trade-weighted
basis,” said CfC Stanbic economist Jibran Qureishi during the report
presentation last month.
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