Ideas & Debate

Kenya needs gurus to steer economy in face of runaway exchange rate effects

NT

The National Treasury offices in Nairobi. PHOTO | FILE

The other day, as the shilling continued to weaken, the Central Bank of Kenya (CBK) told a Senate Committee that management of exchange rates is not their main target and that there was not much they can do to reverse the direction the exchange rate was taking.

I also understood that the CBK is more into inflation management, and that one of their key weapons for this task is the Central Bank Rate.

In the previous weeks the CBK had already unsuccessfully tried to “assist” the run-away exchange rate by twice raising the Central Bank Rate.

While the exchange rate refused to change its direction, the CBK interventions left the market with higher lending interest rates.

Since the CBK has “disowned” responsibility over the exchange rate, then we are compelled to assume that it is the Treasury that has that mandate.

And in deed the Treasury has often been pumping dollars into the market to try to tame the exchange rate. But at the same time, the Treasury is under intense pressure to amass enough dollars to pay off overseas commitments.

The Treasury is also competing with the other shilling borrowers to accumulate enough shillings from the market to finance a huge national budget.

This apparently leaves the Treasury with less flexibility (and independence) to influence (or control) both the exchange rate and the interest rate since it is equally a player.

Besides the CBK and Treasury who else is independently having to make critical decisions on the fate of our economy? It appears that there is an absence of a unit in Kenya that should take collective and coherent responsibility in respect of the Kenyan overall economic direction.

There is an apparent disharmony in decisions and actions in respect of matters that impact the economy (budgetary, fiscal, and monetary).

I do not know who recommends key decisions that impact on the short and long-term performance of our economy. Is it the Treasury, the Ministry of Devolution and Planning, or the National Economic and Social Council? Or could it be the International Monetary Finance and World Bank during their routine inspection tours?

We may need to have in place a “formal” group of men and women who are gurus in national socio-economic matters, who routinely and collectively deliberate the economic destiny for this country.

It is this group that can recommend quick economic corrections before things get out of hand, while advising on long-term economic plans. It may be a bit out of date to keep quoting and hiding under Vision 2030.

Going back to the three parameters of interest rates, exchange rates, and inflation, what is currently happening does not look good for businesses and consumers.

Economic experts and analysts can discuss the pros and cons of low/high interest rates and exchange rates, but the end-game is that costs and inflation are going up.

I will narrate an experience I encountered around 1993 when both the exchange rate and the interest rate in Kenya had gone wild.

I visited a hardware shop at Karatina town intending to buy some construction steel. On asking Mr Patel why his shop was virtually empty and without steel, he painstakingly explained to me how he was making more money by not stocking and selling.

With the prevailing high interest costs, financing the working capital was prohibitive and profit mark ups were not sufficient to cover this cost.

With high interest rates on Treasury Bills at the time, Mr Patel was making more net income with less business risks. It was more prudent, he said, to liquidate the stocks and put the cash in Treasury Bills. I also observed that he had sent home a number of his workers.

We are of course nowhere near where Mr Patel had reached, but directionally businesses, farmers, entrepreneurs may be slowly heading there if the lending rates remain high.

A weak shillings also makes imported inflation quite high thus increasing cost of working capital even before the bank manager pronounces high overdraft rates.

In respect of the worsening exchange rate there appears to be general concurrence by most of the economic experts and analysts that as long as our dollar outflows are higher than inflows, the shilling shall always remain vulnerable to volatility.

Government agencies also appear to acknowledge this fact, and that is why they have been working hard to promote tourism, and chase after more foreign investments.

The government has also talked about planning to boost industrialisation, and increase the value of our agricultural exports.

On the hand it is also understood that there has been massive dollar outflow from the Nairobi Securities Exchange and also by way of payouts of huge dividends earned mainly in the services sectors.

So all the good ideas and opportunities to make Kenya vastly “dollar surplus” are there and what is not quick enough is implementation.

The big caveat is that with improved governance and accountability, Kenya can attract many more global partners that will make the realisation of the “dollar surplus” goal quicker and easier.

In the meantime we need to quickly address the cost of credit by somehow reining in the lending rates. I have no idea how this will be achieved, but what is true is that with expensive credit the economy will not grow as quickly, and jobs shall not come in large numbers.

Mr Wachira is the director, Petroleum Focus Consultants, [email protected]