House team missed the mark on shilling probe

After more than four months of investigating reasons for the recent depreciation of the shilling, a parliamentary committee has recommended that Central Bank of Kenya governor Njuguna Ndung’u steps aside.

The team wants a tribunal formed to investigate Prof Ndung’u’s conduct for “his failure to manage the depreciation of the shilling.”

In its report, the committee notes that it has considered a range of causes of the fall of the shilling. It divides the causes into economic and “human and institutional failures”.

The committee concluded that economic causes such as wide current account deficit, the Euro crisis, large import bill of non-essential commodities, and the Arab Spring are still in place even after the shilling recovered its value in December and therefore could not have been the root causes of its depreciation.

Their decision to ask for the governor’s dismissal was driven by the so called “human and institutional failures”.

This is a very simplistic view indeed.

A country such as ours is bound to suffer once in a while from currency depreciation as the economy is not export driven.

Lesser exports mean lesser dollar inflows, weakening the shilling . This country fulfils all its oil requirements through imports and payments for this is done in dollars.

When the shilling started depreciating against the dollar, oil imports became dearer. Importers, out of fear that the shilling would depreciate further, went on a dollar buying spree which raised demand for the currency in the forex market — the shilling fell further.

Currency depreciation

Many other currencies also depreciated against the dollar during the period.

The sovereign debt crisis in Europe led to shifting of capital from Europe to USA, resulting in the appreciation of the dollar at some stage during the shilling’s low points.
The MPs should understand that depreciation of the local currency is sometimes linked to the appreciation of other currencies.

The reason why the shilling has appreciated despite some of these economic conditions remaining constant is because CBK has taken drastic measures to strengthen it. However, the move has also caused side effects such as high interest rates and a slowdown in growth.

It is in fact ironical that the committee recommends in the report that CBK “put in place deliberate mechanisms to reduce the interest rate to affordable rates within three months of adoption of this report by the House.”

Oh dear! Do the MPs know the relationship between interest rates and foreign exchange markets? Will CBK’s “deliberate mechanisms” to reduce interest rates not lead to the shilling depreciating again?