Opinion and Analysis
EDITORIAL: Deal swiftly with economy’s imbalances to save shilling
Posted Wednesday, January 11 2017 at 18:37
The Kenyan shilling’s continuing slide down the slope in the past couple of weeks, though portending serious consequences, was not totally unexpected.
That is a good or bad thing depending on where one sits in the economy.
First off, exporters who include tea, coffee, horticulture and mining sectors will be excited that the domestic currency is ‘‘distressed’’.
That feeling will only be partial given that these important players also need to import inputs and transport goods to the market culminating to a reality check as the cost of imported oil rises and with it the cost of producing goods.
That, however, is only one side of the balance sheet. The reality is that Kenya is a small open economy that relies much on imports. It permanently carries a balance of trade deficit, not to mention an ever-ballooning fiscal hole.
What therefore matters most is the import side. Besides oil, an array of intermediate goods and machinery for local industries and infrastructure development are imported.
To its credit, the Central Bank of Kenya has fought the pressure in the marketplace by releasing hard currencies and -- with the backing of the IMF’s Standby Credit things are expected to remain in shape.
But that is only half the story. Given what is going on in the economy, there is clear evidence that some of the shilling’s problems arise from the challenges in the fiscal space.
This is because of the huge foreign debt servicing burden that the country is carrying is only expected to increase this year making it difficult to find quick fixes to the market volatility.
Then there are the supply side challenges that are expected to come with the onset of a drought that has begun in earnest in many parts of the country disrupting agriculture and the pricing of produce.
Add on to all this the fact that this is an election year with possible negative effects on key sectors of the economy such as tourism and you start to get to the depth of the challenge.
This means, there should be no expectation that the Central Bank of Kenya alone has some magic wand somewhere that it will use to calm the markets.
The Treasury must be ready to work with the Central Bank of Kenya to find viable and lasting solutions to the economic fundamentals that are the real cause of the currency’s troubles.