Opinion and Analysis
Why the Kenya shilling should be allowed to slide
Posted Tuesday, June 26 2012 at 19:45
In the last few weeks we have watched with trepidation as the shilling slid. Political arm-twisting and perhaps well minded market operations played out in the week coming up and after the budget and the shilling gained so much ground that it is now at 83 against the dollar level.
We, however, have missed the point of currency exchange rates, their purpose and crucially, what they indicate of their economy, when freely tradable.
An exchange rate between two currencies, say X and Y should essentially provide a relative comparison of the capacity to consume and/or produce a similar good or service in respect to each economy.
So a 1:1 X to Y exchange rate means that the two economies market dynamics are essentially the same and one can enjoy the power of say currency X in a similar fashion in economy Y.
In Kenya’s case, our biggest problem has been an exponential growth in debt, both public and private without a simultaneous growth in production, specifically exports.
For example, by comparing our exports and imports of goods in the 90’s and our levels today, we basically export at the same level but import almost 8 times more.
This means that our Balance of Payment (BOP) not only is in deficit but continues to grow as public and private debt grows.
The market felt this last year and launched the ambush that dropped the exchange rate past the 100 to the dollar mark.
In fact if it was not for the Central Bank’s market intervention, almost daily for the past couple of weeks, we would be carrying around weaker shillings today.
Which begs the question, why does the CBK continue to support an unsustainable exchange rate, at the tax payer’s expense?
Being an election year, the reigning administration would like to maintain a favourable environment for the electorate.
Despite the pain that we shall feel with a weaker shilling, I support its weakening. We need to stop importing everything that we think of into the country, especially when we have some of those resources here.
A weaker shilling also encourages foreign importers of our goods, as their purchasing power is increased by the weakening, additionally driving growth, employment and inclusive gains for all.
The writer is an Actuarial Science student at Jomo Kenyatta University.