How to Apply for KRA Pin

Last Updated, August 2017

  • Resident Individuals : National Identification Number and Date of Birth
  • Non – Resident Individuals: Alien Registration Number
  • Companies and Partnerships: Certificate of Registration Number

How to Apply For KRA Pin Using ITAX Portal

The Kenya Revenue Authority has upgraded the tax collection and management system. They have thus shifted from Integrated Tax Management System (ITMS)to the new ITAX system. Those individuals with PINs generated using the old system are being requested to update them into the new Itax system. The same case applies to those who are applying for new PIN, they are supposed to use the new ITAX system. I will try to give you a simple procedure of how to go about it when you are applying for your PIN the first time using Itax Portal.

If you already have a Pin generated using the older ITMS system, you should Update your KRA pin to iTax.

How to Update KRA Pin to iTax

It has become mandatory for Kenyans with old ITMS Personal Identification Number (PIN) to update to iTax. Kenya Revenue Authority recently upgraded the tax collection and management system from Integrated Tax Management System (ITMS) to the new iTax System. Even those applying for new Pin must apply for KRA Pin using iTax option.

How to Update Your KRA Pin to iTax

  • The first thing is to go to iTax portal; you can click on this link. This will land you to iTax online services page.
  • Enter your pin number and click on continue.
  • You will get a message that ‘you have not updated your details in iTax. Click here to update.’
  • A new page will appear where you will select tax payer type and citizenship. Tax payer type is either individual or non-individual (for company, NGOs, and others).
  • Fill your national identification number, date of birth and security stamp. Click on submit. Confirm you want to submit the data.
  • Ipage update page will open and most of your details will be auto populated.
  • Check if all the information is okay on all tabs. You can update any information you want like the address and contact details. Ensure the email provided is the right one because your updated pin will be sent to it. The income tax will be automatically set to what you had previously chosen and you cannot change unless you visit any KRA office.

Submitting Your Pin

  • Perform the arithmetic operation at the bottom and then click submit. There will be a pop up asking if that is the email you want to use for the PIN you have applied. If you are okay with that and click okay, the form will be submitted. You will get a PIN immediately on your iTax page. Download it and print. Another copy of your PIN will be sent to your email.

You can leave things as they are but you will be missing one crucial final stage of creating your iTax log in password.

Creating your iTax Log in Password

Log in to your email and you will find your PIN and password that have been generated by iTax. Open iTax portal again and input your pin, password, and arithmetic calculation. In some area copy paste is disabled so you will have to rely on manual entry. A new page will appear that will let you change your password and as well as create a security question. Make sure you do not forget your password.

After getting your Pin using Itax, it will be easier to apply for Tax Compliance Certificate.

How to Apply for Your KRA Pin Using Itax Portal

The first thing is to go to the iTax Portal you can use this link https://itax.kra.go.ke/KRA-Portal/ . Upon the portal opening, you will see two options or rather two questions:-

  1. Do you have a PIN?
  2. Do you want to apply for a PIN?

When applying for a PIN for the first time, use the second option. Click on the “Register’ link and a new web page will open.

On the new page, you have to fill two questions:
a) Tax Payer type – individual – this is for an individual person as opposed to a company. Non individual – this is the option to use when applying for a company, NGO, International Organization, Diplomatic Organization, Government Organizations, and such other types of PINs.

b) Mode of registration – there are two modes – Online and Upload form. Use the online mode and click next to proceed.

On the new page there are four tabs at the top;

  1. Basic Information
  2. Obligation Details
  3. Source Income Details
  4. Agent Details

Basic Information

On this Tab, you will have to fill residential details first. Select your citizenship and move on to select your profession. Next input your ID number and date of birth. If the two are correct, a lot of information will be populated automatically. The other details you will have to input are your physical address information, postal address, and contact details. When inputting your email, make sure it is one you have access to or it is functioning. Once you have filled the necessary parts click on next button at the bottom of the page.

Obligation Details

On the Obligation Details page you are supposed to fill your tax obligation. The obligations available are Income Tax Resident, Income Tax Non Resident, Income Tax PAYE (for employer only), Turnover Tax, and Value Added Tax. For an individual Kenyan citizen, you will use Income Tax Resident. Remember to choose the registration date which will be the date you are applying for the PIN. 

Source of Income

This is the last tab you will have to fill and what is required is your source(s) of income. There are three options, Employment Income, Rental Income, and Business Income, just fill in the appropriate one and click Add. Below that, you will also have to select the sector of the economy you are involved in among the ones on the list. Click Add to save it on the database. Click on next to continue when done. 

Agent Details

You will most likely skip this option unless you have an agent authorized to make any submission on your behalf.

Final Stage

Perform the arithmetic operation at the bottom and then click submit. There will be a pop up asking if that is the email you want to use for the PIN you have applied. If you are okay with that and click okay, the form will be submitted. You will get a PIN immediately on your Itax page. Download it and print. Another copy of your PIN will be sent to your email.

You can leave things as they are but you will be missing one crucial final stage of creating your Itax log in password. 

Important

Once you become registered and get your PIN, you are supposed to be filling returns. For VAT, it is done monthly and Income Tax Individual once in a year.

Creating your Itax Log in Pasword

Log in to your email and you will find your PIN and password that have been generated by Itax. Open Itax portal again and input your pin, password, and arithmetic calculation. In some area copy paste is disabled so you will have to rely on manual entry. A new page will appear that will let you change your password and as well as create a security question. Make sure you do not forget your password.

How to Apply For KRA Tax Compliance Certificate Online

How to Apply For KRA Tax Compliance Certificate Online

The KRA Tax Compliance Certificate is a valid documentation issued by Kenya Revenue Authority to indicate that an individual or a company has been paying taxes. There are some places one cannot be able to transact without showing this vital document. For instance those who intend to apply for tenders need to have this certificate for them to be able to proceed. This hub will show you the necessary steps to follow in order to be able to apply for KRA Tax Compliance Certificate online. 

Apply for Tax Compliance Certificate Online

There has been rapid technological improvement in most government offices in Kenya. This has mostly been done to create transparency in these offices and in the process eliminating corruption. The digitization or rather computerization of services has also helped increase the efficiency of how business is done. Kenya Revenue Authority has also not been left behind. In early days, application for the Tax Compliance Certificate was being done manually. Now things have changed and you apply for TCC online.

Before You Apply for Your TCC Make Sure You Have

  • Make sure you have a pin and if you do not have apply for KRA pin Using iTax portal.
  • Filed tax returns for the registered tax obligations
  • Paid the assessed taxes
  • Declared the correct income.

How to Apply For Your Tax Compliance Certificate Online

For you to apply for the TCC you must be a person or company that pays taxes and has got no arrears. If you have missed some months, you will not get issued with the certificate. The best thing if you have not paid your taxes will be for you to check with your KRA office and sort out the issue. For those who have paid their taxes, this is what you need to do to be issued with the certificate. It is an easy process.

Process of Applying for Tax Compliance Certificate

  1. Make sure you have upgraded your PIN from ITMS to ITAX.
  2. Log in to the ITAX portal using your PIN and the password you created and the security stamp provided (in form of a math test) and login.
  3. After logging in, head straight to the Certificates link. Click on the Apply for Tax Compliance Certificate.
  4. A new window will open with the tax payer Pin and name displayed. There is a text area where you will give the reason why you are applying for Tax Compliance Certificate.
  5. Click on submit after typing the reason for your TCC application.
  6. You will get a message that application for Tax Compliance has been submitted successfully.

The next thing is to download the acknowledgement receipt which is a sort of waiting document. Click on the link provided and download the acknowledgement receipt.

The Acknowledgment Receipt

The acknowledgment receipt is also sent to your email. The next thing is now to wait for your Tax Compliance Certificate to be processed by those responsible for it. The waiting period is not defined and can go up to a week or even exceed. You should keep on checking your email for feedback concerning your Compliance Certificate. The best thing is to apply for it early enough so that you do not end up feeling frustrated as you wait.

Tracking the Status of Your Tax Compliance Certificate

You can use the acknowledgement number to track the status of your application any time.

  • To do this, go to useful links option and click on Track Status of Application
  • Enter the case type which should be Other Registration, enter your PIN, date you applied and up to when date.
  • Enter the reference number – get this one from the acknowledgement receipt and then click on consult. You will get the status of your application though it is not much information.

Once your certificate is processed and sent to your email, the next step is to print. It is valid for one year from the date of issue.

How to file Nil VAT Returns on Itax

It is compulsory for companies in Kenya to file VAT returns. VAT returns are filed every month and the last day of filing is the 20th of any month. Filing yours returns after the deadline will attract a penalty. Failing to file your returns is catastrophic as you will be fined 10,000 for each month you have not filed. Also late registration for Value Added Tax for a company will attract a penalty.

Thus it is absolutely necessary for any company Limited or Partnership to file their VAT returns monthly. If your company has not conducted any business, you are still supposed to file your returns. This is where you file nil return. In early days, these returns were being filed manually but a lot of changes where digital technology is being applied have occurred in Kenya. Nowadays, filing is being done online using the iTax platform.

Requirements for Online VAT Filling

For nil returns, you will be required to have your pin number and password to be able to log into the iTax platform. If however you have not updated your pin from ITMS to iTax, you will be required to do so first. You can check this guide on how to update your PIN to Itax Portal.

Logging Into the Itax Platform

  • Armed with your pin and password, you only need to type itax.kra.go.ke on your browser. Then enter your pin and click on continue.
  • Enter your password and answer the mathematical quiz you will encounter (security stamp). Click on log in to gain access to the Itax portal.
  • After logging into your portal, locate the ‘Returns’ menu and click on it. Then select the option ‘file nil return’.
  • Select the obligation which of course will be Value Added Tax (VAT).
  • Select the period of return which is usually the previous month and then click on submit. You will get this warning, “Dear Taxpayer filing of NIL returns is only applicable in cases where you have NO transactions to declare for the period, Are you sure you want to file Nil Return?”
  • After successful submission, a PDF receipt will be available for download. Download it and print it for your records. However, it is not necessary to print this receipt; you can always query the system to see your previous payments.

In Case Of System Errors

There are times when the system is having problems. Such times it does not generate an automatic PDF receipt for printing. What you need to do is to view your filed returns to see if your transaction has gone through. You can also print from this point if need be. To view your filed returns click on “Returns’ menu and click on filed returns. Select the tax obligation (VAT), Type of return, entity type, the return period from and to, and then click on consult. You will be able to see the detailed report for that specific month you have selected.

How to Apply for KRA Pin Certificate

KRA Pin Application

This method of using ITMS has been stopped please apply for your PIN using Itax option.

KRA PIN application is a hub that has been specifically created to help people apply for KRA PIN number online in Kenya without problems and to shorten the time it will take you to apply and get the KRA (Kenya Revenue Authority) PIN.

The issuance of PIN has been fully automated following the successful launch of electronic registration services in Kenya. The use of Personal Identification Number (PIN) has also become mandatory in most government offices thus it is important to know how to apply for the KRA pin online.

University students applying for HELB loan also require the KRA pin.

Steps to follow for successful KRA pin application

The following steps will guide you on how to apply for the KRA pin. Before you proceed, make sure you have your National Identity card. If not, make sure you know the exact details in it.

The best way to do it, is to have another tab open where you are going to access the KRA’s website. Then you can be able to follow these simple steps one by one. Do not be in a hurry, read every line here and also on the website as you start filling in your details.

1. Visit the KRA’s website by typing the following in your browser, www.kra.go.ke/portal. Alternatively, you can Google KRA and select the first link you see.

At the center of the page that will open, you will notice an area written “KRA Online”, below there, click on where it is written “Click Here, To Apply for your PIN and/or Submit Online Returns.”

2. On the new window that opens, below the message “Welcome to KRA Online services.
Please enter your ‘User Id’ and ‘password’ to access the system services”
. click “on new tax payer”.

Click on ‘New Taxpayer’ when applying KRA pin for the first time

3. On the new tax payer window, which is written “Pin assignment for new tax payer”, select whether you are applying pin for Resident, Non-Resident or Company. Then click on validate.

4. A new window opens where you have to fill the following details:- ID Number, Date of Birth of applicant, District of Birth of applicant, (these fields are mandatory). Then you can also fill Mother’s last name and Father’s last name, although these two are not mandatory. Then you will have to type the year of birth of the applicant and then click on validate.

5. If the information you have entered is correct, a new window will open with some of your details like Father’s and Mother’s name already pre-recorded.

6. Now fill in the following details correctly found in Section 3, the ones marked by an asterisk are a must; for physical address, City/town, Street/road, building/location, Area code, Lr No (you can click on any number there). For the details you do not have, you can write NONE.

  • For postal address, fill in the Box No and postal code.
  • For telephone fill in the land line and area code, and mobile.
  • For Email address, enter your email address and make sure you enter the correct email address because that is where your pin will be sent.

The other information to fill is your Main business activity (if you do not find the one you want, you can select others not defined) and lastly the tax payer obligation. Leave alone the Secondary business activity.

Four Section 4 fill in you tax payer obligation, most of the people are under the Income Tax Individual (IT1).

Section 6 – Once you are satisfied the information you have given is correct, tick the check box at the bottom and then submit your form.

Thank you, Dear Customer, Your registration has been successful, Your PIN and password will be sent to the email address provided by you for reconfirmation, as well as security stamp that is also sent, whose content must be entered also next time you log in.

Please change your password the first time that you will connect to KRA.

7. Now you can open another window for your mail and check the details that have been sent to your email account. These are, your Pin, Password, and security stamp.

8. Go back to the KRA Website and at the top right hand side click on Main menu. Once the main menu opens, input your pin, password (you can copy paste these) and the security stamp (if the security stamp is not clearly visible, you can download it). Then you click on the log in button.

9. In the next window that opens, you must change your password, so input a new Password which should be of 8 characters were 6 of them must be letters and 2 must be numbers. Note down your password in case you forget.

10. Now to print your Pin certificate, click on main menu and under the Registration Application click on the Registration Certificate. Now you can print your Pin certificate.

KRA Pin Processes

How to apply for a company’s PIN

The process of applying for a company’s pin is easy and straight forward as long as you have the following with you :-

  • Company’s Certificate of Registration
  • Date Business Commenced
  • Associates PIN (These individuals PINs must be registered through the online process, you can not use the old manual PIN)
  1. Follow stage 1 and 2 as above.
  2. Select company and validate.
  3. Fill the fields for Company’s Certificate of Registration and Date Business Commenced.
  4. Click on validate, if the details are okay, a page opens.
  5. Fill one or all the associates PIN, select relation and add to list.
  6. Proceed filling the form as above for individual.

The process of KRA online pin application should take you just a few minutes. If the explanation was helpful or if there is an area that needs improvement, you can tell me.

Kenya Revenue Authority: How to make payment of your Returns via M-Pesa on iTax

FAQs For Other General Questions

How can I know my PIN and station if I have my ID?
You can query through dialling (572) from your mobile phone and follow the steps to get the information. You are charged a small fee of Kshs 5.

Does KRA offer training on iTax?
i.Yes. Training is done free of charge every Thursday at 5th floor Times Tower. You can also visit our nearest KRA office. . .

ii.User guides are also available at KRA offices and website to provide step by step instructions on how to navigate through the iTax system. . .

iii.KRA intends to partner with appointed, licensed and trained Intermediary Agents who will assist taxpayers in Registration and filing of tax returns. . .

iv.KRA registered Tax Agents (Including ICPAK/ LSK members) will be enabled to transact on iTax on behalf of taxpayers using their own log in credentials.
How secure is my information on iTax? Does KRA intend to secure taxpayers information by ensuring that no other party has access to the files once the data is uploaded on to KRA website? Who will be able to access the system and who will not?

1.Some of the security features integrated into iTax are: . .

2.During the update of registration details, the taxpayer is required to provide an email address that is unique for every PIN registered. The security features for the creation of a password have been strengthened and the taxpayer is at liberty to determine the strength of his/her password. In addition the security question authenticates the rightful user on issuance of a new password. . .

3.The security stamp provided upon log in is to prevent phishing programs that attempt to hack into the taxpayers iTax account. . .

4.There is an on-going Government initiative under the National Public Key Infrastructure (PKI) Project in which KRA is a pilotee. This security feature will enable taxpayers to securely transact on iTax and verify their identity via digital signature.

Where can I get support in case I have any issue with iTax?
Through email Callcentre@kra.go.ke and DTDOnlineSupport@kra.go.ke or call 020 2390919 and 020 2391099 an

Highlights of International and Local Markets

Past few days have seen China devalue Renminbi by about 2% that caused quite some excitement in the markets. The depreciation is seen by some participants as a symptom of slowdown in Chinese economy especially in exports which comes as a strong reminder on the importance of maintaining robust domestic demand. Basing long-term growth model on exports alone means the economy becomes dependent on global growth. Devaluation and subsequent depreciation that followed the PBOC announcement had a wider effect on the currency market through safe haven flows. Swiss Franc and Japanese yen strengthened as emerging market currencies weakened. Speculation on the devaluation impacting on FOMC rate setting as well resulted in weakening of the US dollars across the board (yet to quite fully understand some of the exaggerated moves, seems to have been a combination of panic, short-covering and misconceptions behind China’s move).

US & UK markets

Its a bit surprising US dollar and British pound are still in consolidation with tightening cycles just a few weeks away(If Central Bank comments are anything to go by, likely the case). Market participants generally expect the US Fed to hike rates before year end and for the Bank of England to follow immediately after. Although currency appreciation in both instances may complicate situation, both central banks may have to accept stronger currencies since at the moment economic conditions do no warrant extra-ordinary measures.  Holding interest rates at ZLB carries significant risks on the economy since the market might become too accustomed to low interest rates and accumulate too much risks. Goldman Sachs have been calling for a buy in US dollar anticipating a 20% rally in the currency.

Chinese currency devaluation of 2% shouldn’t be a concern in my view, US still has an inflation differential advantage of about 1.5%(prices of goods and services rise faster in China than US, making US more competitive assuming both currencies are unchanged). This means that even though China devalued by 1.9%, the real devaluation was 0.4%. US only starts losing competitiveness once its inflation starts rising to levels at par with China and China continues to depreciate at similar rates.

I am anticipating significant rally in US dollar over coming months.

 

Swiss Franc

Inflation in Switzerland has dropped well into the negative territory. In order to counter deflationary spiral risk (Bad cycle where lower prices of goods cause firms profits to fall, falling profits reduce investments by firms, reduced expansion and investment leads to rise in unemployment, rise in unemployment reduces household incomes, reduced household incomes reduce demand for goods and forces firms to reduce prices of goods and the cycle begins all over again, Japan’s story) and support its industries. SNB imposed unprecedented negative rates on deposits balances exceeding specific thresholds taking into account liquidity in the banking system.

Currency market intervention and negative deposit rates in theory are supposed to work in the following way: Increase in liquidity (lots of cash in the market) increases interest burden on deposits(institutions hold more money in form of deposits). Interventions in foreign exchange markets increase liquidity in the banking system making negative interest rates and foreign exchange markets mutually reinforcing. Increase in cost of holding Swiss Franc deposits is supposed to force banks into diversifying into other currencies.

Interest rate differentials between US and Swiss Franc should ideally see USDCHF rally to parity, some significant rally as well in GBPCHF and other Swiss Franc crosses. Should depreciation cycle in the Swiss Franc begin, would expect declining returns from speculative capital investments in Swiss Franc to cause an unwind of present  accumulation of capital investment and at some point cause sharper falls. But should the unwind fail to get underway, expect more drastic measures from Swiss Central Bank as it will likely resort to desperate measures in weakening the Swiss Franc in order to support its exports and counter deflationary risks. Direct SNB interventions through EurCHF purchases could mess up the ultimate EurUsd short set up atleast in the short-term but it will be a big risk on SNB’s portfolio to have too much exposure to Euro, it might later begin unwinding when CHF depreciation is on course through Eurusd sales (Selling Euros and replacing with dollars).

Will keep tracking the fundamentals but account for margins on either side due to volatility but would advice either refraining or trading on the trend depending on your assessments of technicals(quite subjective).

Kenya

Stock are still in bear market alongside the Shilling. The two could as well be mutually reinforcing, falling shilling is creating expectations of higher rates and expected higher rates creating expectations of slower growth in company earnings. It is also possible anticipation of decline in shilling against US dollar after possible rate hike is influencing foreign investor participation. It would be a great time to watch for the attractive counter before the market bottoms out.

[Post will be updated with more information]

Need for Support of SMEs in Kenya

As much as one would want to believe in free markets where businesses require no support from governments, in a world where there are governments that are already actively supporting their businesses to give them competitive advantages in local and international markets, those ones that fail to support their own businesses are bound to lag behind in terms of growth, or worse, experience exaggerated economic imbalances. These imbalances are in form of widening deficits or a situation where an economy becomes too reliant on specific exports commodities rather than being diversified. Reliance on specific exports means that when those exports under-perform in international markets, the economy weakens which is usually accompanied by rise in unemployment and unrest.

Low unemployment levels are critical in all economies. Employment not only provides necessary accumulation of skill but goes to an extent of even impacting on the next generation through people’s ability to finance their children’s education (that allows for increase in human capital), health services as well as passing on good values. Small and Medium Sized Enterprises (SMEs) are widely recognized on their role in fast jobs creation. In advanced economies, they account for over 95% of enterprises, 60% of total employment and 50% of value added (BIS study paper).

Developing economies especially in Africa have lagged behind on support for SMEs and have instead focused energies on specifics groups especially the youth. Although this is also important in development, neglecting SMEs in general regardless of age groups prevents these economies from harnessing the power of mass talents in the development of the economies. Innovation is not limited by age but rather by ideas and sometimes skill levels. There is great need to extend as much support as possible to these groups.

Some of the barriers that SMEs face when embarking on production of goods and services especially for those involved in exports are well known and are not exclusive to developing economies. These include lack of foreign markets knowledge and the resources that should be devoted to search for markets, being financially unable to wait for delayed payments by buyers of exported goods and services or those ones sold in local markets and need for developing customer base in foreign markets. Advanced economies have country specific export/import banks that fund both buyers in foreign markets and the SMEs, what about developing economies? Are continent specific Exim banks sufficient?

SMEs which report finance as their greatest constraints receive smaller new loans and high interest rates that further constrain their profitability. Policy initiatives that ease these constraints could play a pivotal role in balanced stable long-term growth characterized by high employment rates.

Some of the following measures implemented by the US in support of SMEs should be replicated or debated on their improvement as opposed to current strategy of giving banks funds without onward lending incentives or rate advantage for SMEs.

 

  • Government establishes a team/department/ministry that specifically focuses on SMEs rather than industry in general to study it and give it special attention separate from other enterprises. This team should ensure that SMEs for instance access efficiency enhancing services for free or at very low costs since it might take time before entrepreneurs address this gap. It should also ensure that they are able to access foreign markets and can group small enterprises such as those involved in farming to access external markets that it has negotiated on their behalf collectively.

 

  • Establishment of a rule that prioritizes SMEs that source their goods and services from domestic markets ahead of other contractors as long as price is within reasonable range. This can be in form of target percentages of say 30% of contracts rather than restricting support to youth and women enterprises. Civil servants also need to be educated on the importance of supporting SMEs and the process be made as transparent as possible with easy to use online tendering/contracting platform.

 

  • Special tax treatment for SMEs that gives them a competitive advantage. These may also include employment incentives such as the one in US that gives tax relief to SMEs that employ those who have been unemployed for more than a year and lower taxes.

 

  • Guarantee of risk on loans issued to SMEs by banks without or with insufficient collateral to reduce spreads on savings and lending rates to a level near rates at which established firms obtain financing. These guarantees can be capped at say sh35Billion. Guarantees mean that the government only gets to pay if the SME defaults. If there are a large enough number of new enterprises in an economy where government is aggressively spending and thereby stimulating demand, it will significantly reduce the risks. Extension of funds being in the hands of private banks will ensure more efficient distribution of funds.

 

  • Special funds from government to micro-lenders in form of interest loans. Rate on funds to be inversely correlated amount of lending to SMEs such that the more the micro-lender lends, the lower the rates they have to pay on the special funds. Micro-lenders can be extended to include deposit taking institutions who ordinarily charge high rates on loans.

 

  • Establishment of county level venture funds that match private investors investments in SMEs in counties. This may restrict funding to second stage small businesses such as farming enterprises or those involved in value addition and should offer other support services.

 

  • Special support for exporters that includes guarantees of close to 100% of export loans so that they are not too adversely affected by delays in payments.

 Conclusion

While encouraging innovations vocally, reducing bureaucracies might actually inspire some people to come up with new concepts or develop on already existing ones, I don’t think that is sufficient to support desired levels of growth. It would be more ideal if we not only harnessed the talent pool of huge numbers of people but also provided support that is at par with competitor SMEs in advanced economies in order to achieve greater levels of growth.

Combating Poverty

I was brought up right in the periphery of a mushrooming slum (everyone was later evicted from the land early 2000) and I believe I had a first-hand experience in understanding the dynamics surrounding poverty and could use the experience to offer possible explanations on why most efforts are yet to completely eliminate poverty and why some might reverse progress made so far. We shared same public schools and other social facilities with the extremely poor (by social facilities I mean slid down the same muddy hills, played same games and swam in same dangerous filthy waters). The saddest bit is that in my former congested class of around seventy pupils, only about ten of us made it past high school and about three of us past the university. Female members were the most affected with a majority starting families prematurely. This is despite serious efforts by donors at providing free lunch (diet that consisted of corn and vegetable cooking oil), water, electricity, books and sponsoring students to raise school attendance (long before the advent of free primary school education).

To begin with, I would like to expressly state that I don’t believe there is a single approach with which we can completely eliminate poverty but rather contend that fighting poverty requires a combination of approaches. For instance even if donors were to hand out money directly to poor families without educating them on good money management practices, the kind of inflation that would accompany such an effort would make the effect too temporary and maybe even aggravate the situation(by making them less willing to work hard, raising crime rate and sponsoring drug abusers/traffickers). Efforts to educate too could be hampered by lack of jobs in the economy; lack of jobs for the skilled labour would discourage unskilled labour to acquire the education they need to improve their human capital. It means, if you have a government that consistently mismanages the economy; poverty is almost guaranteed as a perpetual aspect of the economy. The poor due to possibly poverty induced desperation and low education levels may be unable to regulate the government. Philanthropists recognize this and people like George Soros sponsor whistle blowers who expose incidences of mismanagement and exploitation in governments and private entities. The government too no matter how willing, might be incapable of eliminating poverty on its own without external financial assistance (could be through grants, providing markets for goods, stable external and internal economic environment and very low interest loans).

Education

I recently attended university graduation party of an about twenty six year old girl who had managed to get a degree in education (specializing in geography). In recognizing her efforts we had hoped to inspire other children into following in her trail by providing a visual end result and showing that it is achievable (they too can excel in academics). It was a well-attended ceremony and the local area political leader was present. The ceremony was a big deal for the community because very few girls, if any, in the area have acquired full secondary school education let alone university education. Part of the reason why few girls in the area have taken education seriously is because no one in the community has proved as being distinctly better off in terms of living conditions because they were more educated, showing that there lacked incentives. In fact those who were married off early looked like they were better off than the slightly more educated who were still languishing in poverty some of whom have turned to prostitution. The worrying question about her was; would she be able to get a good job and advance far enough in the society for the rest of the community children to emulate her and to provide enough reason for the parents within the community to push their children into achieving higher education? This is why government support in job creation that rewards more those who are skilled than those are unskilled could be pivotal. Yet some local governments fail in creating reward for effort by discriminating and opting to employ based on relation and or even seeming to prefer those with low levels of education (diplomas rather than university education) thereby distorting the desirable incentives. The only comforting bit would be if the educated were to turn back to their community and enlighten them on what should be the appropriate long-term governance good for the community.

In the community I was brought up in, it was observable that most of those who attended high schools that had boarding facilities managed to complete high school education compared to those who attended day schools most of whom dropped out for a variety of reasons. I believe it still plays a role in poor communities. It is difficult to get all children into boarding facilities but as an alternative, there have been commendable efforts by people from outside these poor communities to mentor young people still within the vicious poverty cycle and even taking them away from the community into well-established universities for tuition on weekends and holidays. This is helping introduce the boarding school effect being promoted in certain poor states in the US. Children from poor families especially in slums are different from those in middle or high income families since they face distinct distractions/challenges. Some of those I watched drop out of school dropped out mostly because of influences from members of the communities and problems within families. For instance a former classmate had to drop out after the sole bread winner in his family, step-father, died alone in the house from cancer. If he had been taken away into a boarding facility, he would probably have not felt the need to quit education to provide for the mother and siblings. Others get affected by uneducated people they interact with who introduce them into drugs and have lacked mentors or the opportunity to have the proper incentives for working hard in education.

Some of these problems in education could be solved by continuously encouraging children from these communities to go through formal education, creating visible incentives, having people from outside the communities mentoring and interacting with them, providing support in terms of education and books. I do not think free education alone would be enough to raise skill levels in way that can attract investments that absorb skilled labor from these communities.

Misconception around community currencies in slum areas

I have nothing against innovations that seek to improve the welfare of a community but at the same time I believe that it is appropriate for these innovations to undergo high levels of criticism so that they do not end up creating bigger problems in the long-run. Personally, I had done studies around the subject and feel I could contribute to the debate around their viability.

Community currencies are simply an alternative means of exchange other than the main currency accepted in a sovereign that seeks to allow community members to utilize ‘idle resources’ through a system of credit extension. A grocery that could have wasted perishable goods such as vegetables, they argue, would be able to benefit by giving out the vegetables on credit to a person who runs a hotel (the grocery receives the alternative currency as a measure of the quantity exchanged), in turn the hotel instead of wasting away excess food could sell to the grocery thereby balancing out and smoothing cycles. It all seems perfect from there and is a well-intentioned scheme. Statistical data has shown that there has been increased level of profitability for businesses involved. The rise in profitability makes sense because members are able to consume more than they otherwise would have, member businesses also have guaranteed customer loyalty since they would tend to purchase from each other goods and services. But is it really beneficial in the long-run? I doubt.

From my understanding of slums and most poor clustered communities, they are net spenders (they consume more than they are able to generate from within the community). Most of the goods and services are either sourced from outside or involve components that have to be sourced from outside the community. This means that the system would be creating a wrong incentive, instead of encouraging saving for investments in opportunities some of which are outside the community; it encourages members to live beyond their means. The grocery spends more in buying foods from outside the community because it is able to generate more sales and it has to use the main currency to do that. Isn’t it in effect promoting certain members of the community into earning a lot more at the expense of pushing other members deeper into poverty? Wouldn’t it erode progress made within the community in learning how to manage personal finances? Wouldn’t it be better if instead alternative programmes that seek to create skills that generate revenue within the communities and marketing products from the community to outside markets were encouraged?

Having a community currency also means that it could close out the community from the rest of the economy. The currency is usually not accepted outside these communities. Users of the community currency would tend to use facilities within the community that accept the community currency. They would use medical facilities that are poorly equipped and attend schools with poor quality education within the community. Without interaction with other social classes, poor people interacting with only poor people, it might create less incentive to work harder in order to escape poverty thereby enhancing the vicious poverty cycles rather than eliminating them. Members may also be unwilling to venture out, invest and relocate to areas with better jobs, of the community outside where community currency would not be acceptable.

On a broader perspective, these communities are still part of the economy and are even worse affected by downturns in the economy. Central bank monetary policy tools that seek to control certain aspects such inflation could be hampered since even if they tighten money supply, these communities would be able to sustain demand through the alternative currency meaning that during episodes of high inflation, rates may have to be raised higher than they would ordinarily have. This is besides other factors such as the community currency use reaching a point where it creates enough incentive for fraudulent individuals to start creating counterfeit currencies.

The subject of community currencies which was introduced in the country for experimental purposes needs to be extensively debated and abolished if seen not to be beneficial to the economy just as some developed countries have banned crypto-currencies.

Conclusion

There is no magic bullet for fighting poverty. It needs combined effort from donors and community members both within and outside affected areas as well as a supportive government. It is important that efforts aimed at alleviating poverty be carefully weighed so that the fight continues to be progressive rather than regressive.

UPDATED:Can Kenya Airways Stocks Take Off Again

I remember around early 2000 local popular Sunday Newspaper ran a story in its pullout, Lifestyle magazine, on how people who had managed to get in the National Airlines shares (Kenya Airways) had grown incredibly wealthier from the investment. Some of them had got into the share when it very cheap and managed to register super-normal profits in paper form, since I do not recall any of them saying they had liquidated though they probably did later. At that time the general perception towards the airline industry was that it was a very lucrative investment and that there was, no way one could not turn a profit if made long-term investments in the business. The share managed to rally sharply to above a 100 shilling a share (barely above a dollar at current rates) before peaking and plummeting to present value of around 7 shilling a share (account for dilution through rights issues as it raised money to fund expansion). From a very remarkable growth and promising future great profits, about slightly over a decade after, the airline is now staring at insolvency and has been actively looking for more debt financing aside from most recent extended KSh. 4 Billion. This year it reported half-year losses of about KSh. 10 billion and as expected  (considering financials & managing director press release statements (funding wages through other debt) Kenya Airways has reported a record Sh25.7 billion loss after tax.

Kenya Airways reports loss

Kenya Airways Loss record:

2012 = 4.2Billion

2013 = 7.8Billion

2014 = 10.4Billion

2015 = 25Billion

What is ailing the business? There is a high possibility there is two sides to it, an industry with historically very low margins (net profits made against sales made) and an airline that has lagged its peers in terms of efficiency and competitiveness.

Airline Business

Ordinarily, you would expect if an investment is high risk, it should offer high returns to compensate for the risk but this is hardly the case in airline businesses. Airlines earn the lowest return on capital yet face the second highest volatility of returns and risk (among businesses surrounding airline businesses). According to a 2013 IATA report, airlines have earned the lowest returns on invested capital among all industries over the last 30-40 years. Warren Buffett famously remarked during one of his lectures, in response to a student’s question, that he had a special line he calls when he is about to make an investment in an airline business so that they talk him out of the idea. Obviously, it was for a reason, he had burnt his fingers while buying into an airline because it was an attractive security (on valuation) only to learn through loss of his investment that it was a bad business.

This is not to say that no airlines consistently deliver value to investors, there are but very few of them manage to do this. In most instances returns are usually, just enough for servicing debts but hardly leave anything for those who buy shares in the business and risk capital while there were alternative high return investments.

National airlines

National airlines serve national interests as primary before profits. This is because they help in for instance marketing economy and enabling trade, that is why governments are usually very willing to bail them out. Very few of them are generating profits, Zimbabwe and South Africa airlines were earlier on in the year insolvent and have got help from their governments.

Kenya Airways

Most other network airlines around the world have faced stiff competition from low-cost carriers (airlines that target cost sensitive clients) who not only are low-cost but also on average record higher return on investments. But in the local context, there is only one low-cost carrier which is a subsidiary of Kenya Airways but which also appears (from impression created) to be struggling to break even.

Kenya Airways has found itself falling deeper and deeper into debt, initially due to its ambitious expansion plans and now because of inability to break even. Debt isn’t necessarily an evil, in fact it is recognized for its usefulness in economies compared to re-investing internally generated profits since it tends to make the company that uses debt more efficient so that it can be able to finance cost of the debt (in form of interest). What happens when a business that is struggling to break even, is inefficient and has most of its financing in form of debt? It means it very easily falls into a debt trap that inevitably leads to insolvency.

The business is very low margin (estimated at around sh256 a seat-IATA $2.56), it has to operate efficiently otherwise it would not be able to generate profits. It does not take much of government tax, demand stock or rise in costs to eliminate profits. This makes it questionable how it will fare in a high interest rate environment unless again its debt was guaranteed by the government.

The problem with airlines where the government is big shareholder is that it is easy to hide internal inefficiencies through the problems inherent in airline industries outside their control. Contacts within the airline have highlighted low employee morale (later denied during recent senate probe). There have also been alleged cases of lost baggage especially on the West Africa flights. Due to information asymmetry issues (management knows better), it is difficult to determine what exactly is going on and as to whether rumors that have been swirling around are true. Something that is quite for sure is that even if debts were restructured, operating a network airline (not sure about LCC) without superior customer service and improved efficiencies will make it an unsustainable business model.

My take would be that most of the issues raised are addressed and accompanying measures such as requiring more efficient suppliers/external service provides, subsidized airport charges be effected.

Maybe low fuel costs will help improve profitability and new routes especially to the US, but it will be no mean feat to turn around a company facing serious debt overhang problem denominated in a foreign currency while the domestic currency is depreciating but will be watching commentating from the sidelines how it fares. In the meantime, my view is that it is still a too high-risk investment even for a contrarian although it is highly probable government will try to rescue it.

 

Can Kenya Airways Stocks Take Off Again?

I remember around early 2000 local popular Sunday Newspaper ran a story in its pullout, Lifestyle magazine, on how people who had managed to get in the National Airlines shares (Kenya Airways) had grown incredibly wealthier from the investment. Some of them had got into the share when it very cheap and managed to register super-normal profits in paper form, since I do not recall any of them saying they had liquidated though they probably did later. At that time the general perception towards the airline industry was that it was a very lucrative investment and that there was, no way one could not turn a profit if made long-term investments in the business. The share managed to rally sharply to above a 100 shilling a share (barely above a dollar at current rates) before peaking and plummeting to present value of around 7 shilling a share (account for dilution through rights issues as it raised money to fund expansion). From a very remarkable growth and promising future great profits, about slightly over a decade after, the airline is now staring at insolvency and has been actively looking for additional debt financing aside from most recent extended KSh. 4 Billion. This year it reported half year losses of about KSh. 10 billion and it is reasonable (considering financials & managing director press release statements (funding wages through additional debt)) to expect second half losses much larger than first half losses enough to more than wipe out its previous total equity.

What is ailing the business? There is a high possibility there is two sides to it, an industry with historically very low margins (net profits made against sales made) and an airline that has lagged its peers in terms of efficiency and competitiveness.

Airline Business

Ordinarily, you would expect if an investment is high risk, it should offer high returns to compensate for the risk but this is hardly the case in airline businesses. Airlines earn the lowest return on capital yet face the second highest volatility of returns and risk (among businesses surrounding airline businesses). According to a 2013 IATA report, airlines have earned the lowest returns on invested capital among all industries over the last 30-40 years. Warren Buffett famously remarked during one of his lectures, in response to a student’s question, that he had a special line he calls when he is about to make an investment in an airline business so that they talk him out of the idea. Obviously, it was for a reason, he had burnt his fingers while buying into an airline because it was an attractive security (on valuation) only to learn through loss of his investment that it was a bad business.

This is not to say that no airlines consistently deliver value to investors, there are but very few of them manage to achieve this. In most instances returns are usually, just enough for servicing debts but hardly leave anything for those who buy shares in the business and risk capital while there were alternative high return investments.

National airlines

National airlines serve national interests as primary before profits. This is because they help in for instance marketing economy and enabling trade, that is why governments are usually very willing to bail them out. Very few of them are generating profits, Zimbabwe and South Africa airlines were earlier on in the year insolvent and have been getting assistance from their governments.

Kenya Airways

Most other network airlines around the world have been facing stiff competition from low cost carriers (airlines that target cost sensitive clients) who not only are low cost but also on average record higher return on investments. But in the local context, there is only one low cost carrier which is a subsidiary of Kenya Airways but which also appears (from impression created) to be struggling to break even.

Kenya Airways has found itself falling deeper and deeper into debt, initially due to its ambitious expansion plans and now because of inability to break even. Debt isn’t necessarily an evil, in fact it is recognized for its usefulness in economies compared to re-investing internally generated profits since it tends to make the company that uses debt more efficient so that it can be able to finance cost of the debt (in form of interest). What happens when a business that is struggling to break even, is inefficient and has most of its financing in form of debt? It means it very easily falls into a debt trap that inevitably leads to insolvency.

The business is very low margin (estimated at around sh256 a seat-IATA $2.56), it has to operate efficiently otherwise it would not be able to generate profits. It does not take much of government tax, demand stock or rise in costs to eliminate profits. This also makes it questionable how it will fare in a high interest rate environment unless again its debt was guaranteed by the government.

The problem with airlines where the government is big shareholder, it is quite easy to hide internal inefficiencies through the problems inherent in airline industries outside their control. Contacts within the airline have been highlighting low employee morale (later denied during recent senate probe). There have also been alleged cases of lost baggage especially on the West Africa flights. Due to information asymmetry issues (management knows better), it is difficult to determine what exactly is going on and as to whether rumors that have been swirling around are true. Something that is quite for sure is that even if debts were restructured, operating a network airline (not sure about LCC) without superior customer service and improved efficiencies will make it an unsustainable business model.

My take would be that most of the issues raised are addressed and accompanying measures such as requiring more efficient suppliers/external service provides, subsidized airport charges be effected.

Maybe low fuel costs will help improve profitability and new routes especially to the US, but it will be no mean feat to turn around a company facing serious debt overhang problem denominated in a foreign currency while the domestic currency is depreciating but will be watching commentating from the sidelines how it fares. In the meantime, my view is that it is still a too high-risk investment even for a contrarian although it is highly probable government will try to rescue it.

 

Private Equity in Kenya

In wealth creation there is various investment vehicles that one can choose to use to grow their money and secure their old age. Private equity happens to be one of the ways to invest your hard earned money and watch it grow over a specified period of time.

The PE Concept

The concept is simple; fund managers pool money from high net worth individuals and institutional investors to invest in companies not listed at the securities exchange. The underlying principle is that of getting a controlling stake in the companies through purchase of majority of their equity, improving efficiency in the companies and later on selling off the companies after their value has grown.

The steps sound very easy and fast to achieve, but there are a number of things one must put in place before venturing into the PE industry.

Requirements Before Starting a PE Fund

For first-time fund managers with an interest in the PE industry, a little house keeping is in order before you swallow the bullet. A little it is, but it might take a long time and be very exhausting before you finally can turn on the engines of your PE fund and start sailing through the stormy waters of the PE industry.

First of all you need to have a track record of having successfully grown other companies in the past thus creating value for investors in the companies. Without proof of a superb performance in the past, you are unlikely to get anyone interested in your PE fund. No one wants to risk their money with amateurs! So if you want to one day own and run your own PE fund, you better be getting down hard and dirty in creating value in existing companies and driving them to excellence.

The second most important thing in the PE industry is networks. No other place is social capital a necessity than in PE fundraising. To successfully raise enough funds for your fund, you need to be well networked with respectable business leaders in town. Your former employer and your fellow former employees should be able to sell you for free to investors they are connected to. Your business partners should be your marketing agents and walking billboards all over. In summary, you need to have a strong positive reputation among your peers and in the industry as a whole for you to launch your PE successfully.

The other fundamental requirement is that you should be having your own capital to invest in your PE fund. The investment can range between 1% to 5% of the fund; and it helps the investors to also have faith in the fund by having the owners of the fund investing their money in it too.

Finally, you need to have a placement agent to help you link up with the institutional investors and high net worth individuals. These are the people who help you market your PE fund to the potential investors and help you mobilize the funds you need to launch it. They are very vital in that they are well connected to the investors and will assist you in doing due diligence before getting investors on board. On the other hand, they can advise on the strategic plan for the fund and ease your pressure so that you concentrate on portfolio management rather than the day to day running after investors.

With the above in place you are then good to try your boat in the sea of private equity investments.

In Kenya the PE industry is not as vibrant as in the developed world. This can be attributed to the fact that we are still a developing economy and our financial markets are still growing. However, foreign investors in PE from the West are moving towards the East in China and India as emerging markets; and we can only expect the tide to turn to Africa very soon as our markets mature.

A guest post by RIRO JEREMY of fieconsult.co.ke

Case for Continued Weakness in Kenya Shilling

There are distinct aspects that make it difficult to predict local currency trend over specific time duration. For instance the market does not have large enough number of participants, is not an international currency and its rate is often managed by the central bank through interventions. Despite this, I still hold my contention that the present downtrend is likely to persist over the medium-term especially with the widening twin deficits (budget and current account deficits) and high inflation (and inflation expectations). In the long-run unless there is significant changes made on the fundamental factors(boosting tradable goods sector), any interventions  will tend to not only aggravate situations but postphone volatility. The longer strong exchange rate persist, the more speculative capital accumulates and the more the speculative capital accumulates, the worse the volatility that accompanies peaks of such currency strengths when ‘fundamentals’ (not motivated by total return) and speculative capital move in the same direction.

It is generally accepted by central banks that speculative capital flows have an inherent exchange rate destabilizing effect (exchange rate fails to reflect prevailing ‘fundamentals’) and there is enough evidence to support the same. Markets cannot be relied upon in establishing their own equilibrium. Some central bank tends to mitigate that risk through capital controls and interventions on the basis that it is much easier to control capital when it is moving into an economy that when it is moving out (Philippine central bank collapsed while trying to defend the currency).

Deteriorating Exports

The data I have is unreliable at the moment and much of my views are impressionistic and partly based on conjectures. Commodity prices have been falling and are expected to continue trading at low prices in the medium term. The past few weeks have had a large Tobacco exporter close shop alongside a fluorspar mining company both of which cited low prices as being largely to blame for the exit. Although they represent a smaller fraction of the exports sector, it could be indicative of the likely stress the tradable goods sectors will undergo. The government is trying to slow rising trade balance by restricting sourcing of materials in government projects to local businesses. It is not clear whether it is possible to enforce this rule in practice and on whether the local spending in actual effect will result in further imports to support demand created by the rise in incomes.

The shilling strengthened slightly on nominal (not adjusted for inflation) basis against the dollar immediately after the central bank raised interest rates but has since resumed downtrend albeit at a much slower pace than before the rate hike. The government is still maintaining its aggressive spending stance and running a possible large budget deficit relative to GDP as per the last budget reading. It is also likely to push banks into lending to fund infrastructure development, a money creation process that could result in inflation and further exchange rate depreciation especially if the tradable goods sector is not supported and funds are invested inefficiently. It is also not clear whether government investments will attract much needed longterm capital investments with ongoing allegations of misappropriation of funds and inefficient non-transparent costs investments.

At the moment the economy is experiencing a widening current account deficit that could continue pressuring the shilling. Stronger shilling would have been okay with inflation differential advantage, but inflation at the moment remains higher than in its trading partner economies (whose exchange rates are also depreciating) making it a vicious cycle of high inflation leading to weaker exchange rate and weaker exchange rate leading to high inflation.

External shock risk

At the time of writing, the world’s gaze is focused on the events unfolding in Europe as Greece negotiates with its creditors on a last minute bid to avoid default. Greek default presents a significant market risk in the immediate future alongside possible US rate hike within the year.

In the event of an external market shocks such as Greek exit or US rate hike, international markets are likely to respond indiscriminately towards frontier and emerging market economies that benefited from low interest rates and QE, this could trigger acceleration in loss of shilling against the dollar. Yellen remindee Asset managers that she had already warned them of possible risk in rate hike, they are particularly prone to herd behavior and would be predictable that they could reduce capital investments in these markets. After the initial market shock, differentiation is likely to come on the basis of for instance economic strength judged on fundamentals presented in each economy. Economies with low inflation, strong external and fiscal accounts, more reserves and sound financial sectors are likely to experience less market reactions. At the moment, the country’s biggest advantage lies in predicted high growth rates on fiscal stimulus. Holding adequate reserves is particularly important because interventions will be critical in dealing with the temporary bouts of volatility that will likely arise.

 

Conclusion

Based on my hypotheses, shilling is likely slide towards 2011 lows on RER and nominal basis in the near future especially with anticipated dollar rally from US rate hike. It would be better for regulators to err on the side of caution in inspiring investor confidence and preparing markets for possible shocks.

 

Could Congestion Pricing Help Eliminate Traffic Jam Problem?

Whenever there is a traffic jam, it is not just the commuters who suffer. Manufacturers’ shipments per day to and from the city are restricted, multinationals opt to avoid traffic jams altogether instead of devising solutions to logistic problems, business meeting are reduced to possibly an average of 1-2 and a lot of fuel and time is wasted on roads not to mention increased emissions.

A 2013 research on Indonesia by McKinsey quantified the economic costs of poor road infrastructure at $5.2Billion in 2010 where road traffic was worsened by incentives on car ownership and fuel subsidies.

The usual approach of easing traffic flows through road expansions doesn’t always reduce traffic, if anything, the effect is usually very short-term. Take for instance a road that suddenly increases capacity overnight, the next few days, traffic will flow rapidly because the same number of drivers would now have twice the road space. It only takes a relatively short period of time before word spreads on how that highway isn’t congested anymore. Drivers who had abandoned that road before for alternative routes shift back into that route, other drivers who had been using other routes also shift to the same road, populations attracted by the convenience in access to the city shift to areas near the highway, businesses follow populations and because of demand with time population rises sharply. Within a few months or years, the road could even become more congested than it was before expansion.

This doesn’t in any way mean that expanding road capacities is pointless. With rising populations and growing middle class, it’s very necessary though road construction takes time. That increased capacity road would be able to carry more vehicles, maximum congestion time may be shorted and within the period during which there would be very little traffic, economic growth in the region would accelerate due to ease of flow of commerce.

Congestion pricing  

The Nairobi governor recently suggested that the solution to traffic problem would be people waking up earlier to avoid traffic, but that isn’t possible without any incentives in place. Travelling at the same period of time isn’t necessarily a problem because efficient operation of economy and school systems requires people to go to work and run errands at the same hours so that they can interact. But it’s possible to reduce amount of traffic during peak hours in such a way that people who are not in a rush can chose to travel during off-peak hours and to induce some of the car owners to commute.

Shifting from small capacity commuting vehicles to bigger capacity commuting vehicles could help in partly eliminating the problem, but would the pace of problem elimination keep up with the pace of middle class growth and rise in car ownership? Its debatable, but I would think not necessarily so. Removing other unnecessary impediments that cause traffic jams could work as well, but how about possibly testing automated congestion pricing where motorists could be supplied with payment electronic cards?

That suggested approach in reducing peak-hour traffic by introducing high occupancy toll lanes isn’t a new idea, it has been testing in a number of countries. This can executed by either adding new toll lanes to existing highways or converting underused lanes to toll lanes. This should allow people who have the need to move fast during peak hours to do so without pushing off the road people who have low income. The toll fee doesn’t have to be too high, possibly a $2 charge could work, about just material enough to influence the motorist’s economic decision making. Alternatively, they could introduce peak hours charges where they can charge for use of road during peak hours and make it free for use during off-peak hours. The biggest challenge in introducing the system is in the political implications, but it could help in raising much needed revenues to patch up budget short-falls.

Has it been successful before? Since Singapore introduced electronic road-pricing in the 1990s, peak-hour traffic volume into restricted zones declined by atleast 30%. And during the 7-month trial period in Stockhold, traffic volume in restricted zones as well declined by 22% during peak hours. As a bonus, carbon emissions reduced by 14% as the public shifted towards public transportation and the commuting time of bus riders was significantly reduced. It’s difficult to implement and adequate research and planning should be done before implementing but maybe it could work here.

Case for Under-performance of Gold as an Asset 2015

I contend that gold is going to continue exhibiting weakness against the dollar in value for much of 2015 and the downtrend will likely be a self-reinforcing process. Weakening of gold prices could lead to further reduction of speculative gold long positions and may lead to less demand for the metal from the traditional sources of demand further rein-forcing current downtrend.

Soros was right when he noted that gold has been losing its status as a safe haven after it failed to rally even when the Euro was on the verge of collapse and fed was still aggressively buying bonds. I shall try to explain why the trend has been so.

Prices in the market operate like an auction process. Commodity prices are influenced by supply and demand forces. When demand exceeds supply, prices rise and when supply exceeds demand, prices tend to fall. It is not always that straight forward, disequilibrium exists and prices do not have to necessarily reflect prevailing fundamentals. These price movements tend to have notable effects on the demand and supply constraints in the gold market.

Gold rose from around $457 in 2005 to a peak of circa $1921 at around 2011 and this has not been without substantial effects in the market. I recall early 2011 when it was peaking, those who were buying it defended it as the ultimate hedge against inflation justifiably so, rightfully so because it used to be highly responsive to market risks. Expectation of further rise in prices induced demand from funds, central banks and individuals, and increased demand created attractive prices for increased production. Gold ETFs were created and attracted a lot of interest as they had superior qualities relative to physical gold. They attracted are much less taxes than physical gold and are easier to quickly sell or buy.

The argument on the actual break even so far seems to be highly erratic. Just as in oil at present, when gold prices started falling, some participants made and have continued to make claims as to the break even prices for producers. Some claimed it was $1400, and when $1400 broke, they shifted to $1300 and closure of two big mines, prompted temporary price relief and now that it is trading below $1200, I am at least expecting a shift in the same.

I would not claim I have sufficient data to conclusively make a conclusion on the level of disequilibrium in gold prices that the gold market exhibits, but there are significant changes on the demand side that may precipitate some correction in gold prices or consolidation at least at lower levels.

A huge number of central banks base their portfolio allocations on security, liquidity and return. Gold is no longer viewed by central banks as to exhibiting the former qualities that made it favorable as an asset to hold relative to treasuries or equities. The change was well communicated by the Swiss Central Bank governor who recently noted.

“Gold typically performs poorly when it comes to liquidity and return, and on the security front, gold should be viewed critically in the context of investment policy. Although a certain diversification effect can come into play between gold and equities, I am sure you are also aware that the gold price is even slightly more volatile than equity prices. Just last year, this volatility made itself felt on our balance sheet. The collapse of the gold price in the spring of 2013 was responsible for a valuation loss of approximately CHF 15 billion.”

The Swiss Central Bank has for a period of time simply stopped buying gold and instead has been buying other assets and hence the reduction of it as a proportion of the total overall reserves. Although I am basing this assumption on a conjecture, if we see a similar trend among other central banks, we may see them continue reducing gold holding as a percentage of their reserves as well. Demand from Central Banks has been a strong source of demand in the metal.

Influence of the dollar on gold
Low interest US interest rates, quantitative easing and generally weaker dollar has supported gold over the past few years. Quantitative easing was ended this year and there are expectations that we may see rise in US interest rates coming year. There are general market expectations that divergence in central bank policies in Europe, Japan and US is going to push a lot of money into the dollar either through direct investments in dollars as financial assets or through bonds and treasuries/Equities and this is expected to result in further dollar rise in value. Rise in dollar value alone is likely to see value of gold against the dollar fall. Anticipation of rise in value of the dollar against domestic currencies and possible crisis could o see other central banks buy dollars to build up reserves and in the process push the dollar higher.

Geopolitics
Gold still responds to geopolitical development, instances of geopolitical risks have been resulting in increase in daily volatility but each time prices ease back down within a relatively short period of time aside from when it has been within a reasonable price corrections. There is a school of thought that seems to think that, just as in oil, weakening gold similar to oil puts Russia in an even worse situation and subsequently the Western allies may try to depress their prices. The Russian central bank has been buying gold from the country’s exporters which also accounted for over half of central bank purchases third quarter. They may however start selling to defend the Ruble

Conclusion
It’s highly likely that gold under performs as an asset coming year. Launch of quantitative easing from the ECB may provide temporary rally in prices, but since asset purchases are highly unlikely to include gold purchases, we may likely still see a dip towards $1080 then $1000 area. If prices trade below that level for some time it may prompt liquidation of positions by funds and other speculators in the market which may result in further slide lower. However, I will re-assess my view when prices break and close back above $1280 level but remain bearish until underlying trend turns positive.