The KFC index was created by Sagaci Research as an informal way to gauge whether currencies in African countries are “correctly valued”. It is based on the theory ofpurchasing power parity, which states exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services between two countries. In this case, the concerned goods are KFC´s Original 12/15 piece Bucket and geographically specific to African countries. The KFC Index also covers the United States, France, Spain and the United Kingdom. For example, the average price of KFC´s Original 12 pc. Bucket in United States in January 2016 was $20.50; in Namibia it was only $13.40 at market exchange rates. Therefore, the index suggests that the Namibian dollar was undervalued by 33% at that time.
Inspiration
The index takes its name from the internationalfast food chainKentucky Fried Chicken and is modeled on The Economist´s “Big Mac Index”, which covers countries with McDonald's presence. In Africa, the McDonald's chain is only present in Morocco, South Africa and Egypt. KFC, on the other hand, has operations in almost 20 African countries, which is the highest of any international fast food chain and therefore a more applicable benchmark to use. The index was not intended as a precise gauge of currency misalignment but merely a tool to make exchange-rate theory more digestible.
Limitations
As in the case of the Big Mac Index, the KFC Index was not created to be a highly accurate and precise tool for measuring purchasing power parity and its limitations include factors such as inflation, dietary preferences, socio-economic classifications, levels of competition and local costs. Currency volatility – due to the nature of developing economies, there is more likely to be high volatility in currencies, therefore undertaking this analysis over a one to three month basis could produce large changes and different conclusions. Black market – as there is a thriving market for US Dollars in some countries, it may produce conflicting results compared to the official exchange rate. Angola and Nigeria are examples of these types of markets. The report produced by Sagaci Research takes into account black market exchange rates.
Figures
The February 2016 publication states: Most overvalued currencies 72% 30% Most undervalued currencies -48% -34% -32% The June 2016 publication states:
