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29 June, 2011

Release of Oil Reserves Might Hurt Kenya.

The decision by the Obama administration to release its strategic oil reserve to ease price pressure, brought about by the Libyan crisis, might be too costly to the Kenyan economy if OPEC decides to retaliate by tightening supplies.

The release of the 60 million barrel of oil might help in the short term to bring the prices down, but if the oil producing countries view the action as an affront by a consumer government to control their business ,they might reduce production, further creating a shortage that the strategic reserves can not satisfy resulting in an upward price pressure that might cause a recession in Kenya.

The prices of oil in the international market has lately been falling with Saudi Arabia promising to increase its quota to bridge the gap created by disruptions in Libya.OPEC failure to reach an unanimous decision to increase production might have triggered US and a 28 member International Energy Agency (IEA)decision to release the strategic oil reserves into the market.The oil from the reserves will obviously stir the market in the next few months with prices dropping by about $10-$12, this is according to a Goldman Sachs note.But what will happen after the reserves has been depleted?How will the consumer countries like Kenya protect themselves from the rising prices?

Kenya will enjoy the dropping prices for now, but how will it cushion itself once,as some analyst are predicting,a tightened supply start exerting an upward price pressure by year end?
We have seen how rising oil prices has negatively impacted the Kenyan economy especially the rising inflation and the depreciating shilling,in fact oil imports account for 50% of all Kenya's Imports Bill.

Kenya has no strategic reserves and relies solely on oil marketers’ 21-day oil reserves required under industry regulations.National oil corporation of Kenya (NOCK)is in the process of building a strategic national petroleum reserve but due to the capital outlay required it will need to partner with the private sector.The reserve will hold about 1bn litres — equivalent to 90 days consumption — and help ease disruptions in the supply chain.NOCK has sought consultants for a detailed feasibility study on the development and implementation of the reserves.

Lack of strategic oil reserves in the meantime means the country is exposed and vulnerable to shocks brought about by high oil prices.Treasury, therefore, needs to be proactive and come up with strategies to insulate the country against shocks in the medium term.Treasury and the ministry of energy should continue with their efforts to negotiate with oil producing countries for good prices through bilateral concessions.The economy needs a predictable business environment to grow.Price shocks brought about by oil price fluctuation threatens the growth of the economy and the stability of the nation.

27 June, 2011

Elite Kenyan Families Lack Proper Estate Planning.

Lately we have witnessed some bizarre incidents involving families of some elite Kenyans Fighting over the asset of a deceased family member.

Apart from infighting between family members unknown characters appear from nowhere, claiming to be related to the deceased,The sole intention being getting a slice of the estate.

All this drama can easily be avoided by a simple estate plan.Estate planning is essentially attempts to eliminate uncertainties over the administration of an estate of a deceased person as well as grow the value of the estate by avoiding unnecessary taxes and expenses.

Most people prefer a will(A document that names beneficiaries of the estate) which is good,but it should also be accompanied by an assigned lawyer and a living will(A document that gives a person wishes regarding life prolonging medical treatment)

Involvement of the beneficiaries in the drafting of the estate plan May reduce the possibility of nasty family disputes in future.If the family unit is strong, a family member can be chosen as an executor, but if there is a possibility of a strife by doing so, an independent lawyer, although costly, is advisable.

Another way to manage an estate is by using a Trust. A trust fund is something that is set up for individuals or even organizations and charities that allow the person making the trust to set provisions on the money and other assets inside the trust.Trusts are considerably more complex than executing a last Will, but they offer substantially more protection. Several types of trusts exist and each offers pros and cons. However, all require a legal Will and designated Trustee to oversee estate settlement procedures.

The trustees, as legal owners of the trust's property, administer the affairs of the trust this may include investing the assets of the trust, ensuring trust property is preserved and productive for the beneficiaries, accounting for and reporting periodically to the beneficiaries concerning all transactions associated with trust property, filing any required tax returns on behalf of the trust, and other duties.Depending on the terms in the trust instrument, the trustee might decide weather a beneficiary would receive trust assets for their benefit.

Estate planning is involving, but very critical in ensuring a demise does not result into a soap opera that tears the private affairs of a family into a public spectacle.

20 June, 2011

Is Ksh. under speculative attack?

Recent rapid depreciation of the shilling tends to raise the question, is the Kenyan shilling under speculators attack? The CBK floating exchange rate system has been susceptible to unusual volatility that had forced the central bank to intervene from time to time to shore up the shilling, but lately CBK has decided not to intervene and let the market forces dictate the shillings fate.

Currency speculation exists whenever someone buys a foreign currency, not because she needs to pay for an import or is investing in a foreign business, but because she hopes to sell the currency at a higher rate in the future (in technical language the currency "appreciates"). This is nothing more than the old rule of buying low and selling high—only with foreign money.

Sometimes currency speculation might be necessary especially when exporters wants to exchange their currencies to local currency so as to offset local expenditures,Hence the need to engage forex traders who might charge a commission for the exchange and in most cases speculate on the foreign currency hopping to get a higher value from the market.

Speculators sometime use very sophisticated metrics to measure their risks and in most cases engage in guess work to influence depreciation or appreciation of a certain currency.The data they rely on may not in some instances reflect the reality on the ground hence affecting implementation of essential government policies and financial upheaval as we are currently witnessing.

Most speculators are Banks,just a few days ago CBK warned banks engaged in currency speculation they would face certain undisclosed disciplinary actions and within a few days the shilling started to appreciate.The involvement of banks in currency speculation explains why policies which reduce the short-term profitability of financial and industrial businesses triggers the selling of a currency, while policies that expand or open profit opportunities influence the buying of a currency.

Currency speculation is quite a lucrative business, a trader can make huge profits in a matter of minutes.If you look at financial reports of several large bank you would notice increase in Foreign exchange/treasury or other incomes over the years, which indicates currency speculation is rife in the banking industry.

CBK might be partly to blame for the current crisis hitting the shilling this is because its IMF funded dollar reserves might have sent signals of insufficient Foreign exchange reserve and absence of exchange controls.The problem might also be exacerbated by its constant borrowing and participation in the currency market as exemplified by its recent purchase of the Euros.

CBK latest moves although meant to maintain stability in the market might in actual sense result in the following negative outcomes:

(i)Destabilize exchange rates and asset prices as we are witnessing currently.

(ii)Results in serious losses of output,investment and employment bringing increased poverty.

As I had indicated earlier CBK knows who the speculators are and I dont know why measures are not been taken to bring them under control.As things stand, the speculation on the shilling is risking the lives of poor Kenyans as fears of increased inflation grow.Taxes or controls should be instigated against speculators to curb the menace.The tax will not only benefit the economy in terms of development but also bring down currency speculation.