The drop in the value of the Pakistan official currency, the Rupee, has slowed the uptake of Kenya tea in the international market, exposing farmers to the possibility of less final bonus for 2019 compared to last year. The move is expected to further squeeze the rural economy.
Pakistan is still Kenya’s top tea buyer, being the destination of an average of 39 percent of total annual tea exports, according to the Kenya Tea Directorate. But its currency has lost value against the U.S dollar meaning that the Pakistanis are now being forced to pay more rupees for a kilo of Kenyan tea meaning many could be buying lower volumes to stay within their budget.
Financial data shows that the Pakistan Rupee traded at 160 rupees for one U.S dollar last week, a devaluation from a high of 116 rupees for one U.S dollar in May 2018, a significant drop of 27.5 percent.
The loss of rupee value is being attributed partly to the decision by the government there to agree to the terms of the International Monetary Fund (IMF) to put its currency on a free-float exchange rate mechanism, just like that of the Kenya shilling.
The bigger scenario is the economic crisis that faces Pakistan, which has forced it to seek a bailout from the IMF amid speculation that the fund has put tough conditions that may lead to less government spending. Pakistan, just like Kenya, has borrowed heavily from China.
A report released on September six by the State Bank of Pakistan, which is equivalent to its central bank here, forecast possible further devaluation of the currency, which may widen the woes for local tea farmers.
“The Pakistani rupee may encounter events of depreciation against the US dollar over the next six-month period. The likelihood of occurrence of a high-risk event in Pakistan’s financial system over the short-term is slightly higher than the medium-term,” said the bank in the perception survey.
Data from the Kenya Economic Survey 2019 shows that the value of total Kenya exports to Pakistan declined from Sh64.1 billion in 2017 to Sh59.4 billion in 2018, on account of a 7.5 percent decline in the value of tea exports.
But the overall export volume of tea rose by 7.2 percent from 467 thousand tonnes in 2017 to 501.8 thousand tonnes in 2018, because of sale to the new markets. Tea, however, remained Kenya’s top foreign income earner at Sh138.8 billion in 2018, followed by horticulture at Sh124.8 billion.
The latest developments come at a time when directors of the 69 Kenya Tea Development Agency (KTDA) managed factories are meeting to review their financial books in order to determine what each factory will get as a bonus.
The final bonus is usually based on the amount of tea a particular factory has sold and also the quality of the tea. That of higher quality fetches more money.
The expectation is that the bonus will be less this year because of less demand from Kenya’s main buyer Pakistan, political turmoil in another buyer, Sudan, and a significant price drop at the Mombasa auction.
KTDA said in a statement last week that tea prices on average fell 21 percent to Sh214 per kilo this year from Sh271 per kilo in the 2017/2018 financial year, meaning that the bonus may drop by as much.
Last year, tea farmers received a total bonus of Sh85.74 billion being the revenue of the sale of tea for the year ended June 2018 from compared to Sh78.31 billion recorded in the 2016/17 financial year.
The 9.4 percent increase in revenue was largely driven by a 21 percent growth in green leaf production as tea growing areas received improved rainfall during the period compared to the dry conditions experienced the previous year.
However, tea farmers received less bonus per kilo compared to the previous year, as higher revenue was not because of better prices but higher volume.
Farmers earned an average rate of Sh52.51 per kilo of green leaf delivered in 2018, a drop from Sh58.61 earned in 2017. KTDA attributed the drop to higher costs of production and depressed prices during the last quarter of that financial year.
KTDA said in a statement that a number of challenges still face the tea sector preventing farmers from fully realising the value of the crop.
Among the challenges is the high cost of energy and labour. “The factories are also grappling with other challenges like tea hawking that has led to a reduction in the amount of green leaf available to some factories, thereby affecting their operating capacity and quality of leaf available for processing.”
To deal with rising costs of production, KTDA said factories are investing in small hydropower stations (SHPs) to deliver affordable and quality power to factories. Some of the SHPs that have been completed and are generating electricity include Imenti, Gura and Chania. However, the progress of the mini-hydro’s has been slow, threatening to deny farmers of the invested value.
KTDA said as part of diversification efforts, a number of factories have ventured into orthodox tea production in a move to reduce reliance on Black CTC tea. Previously, only Itumbe, Kangaita, and Michimikuru were producing orthodox teas.
“Production of orthodox teas opens the door to new markets in Russia, USA, Iran, and Germany,” noted the agency.
Low bonus means farmers will continue to feel the economic weight of the low commodity prices also being experienced in the dairy and coffee sectors.