Kenya should think currency swap agreements with China

Does Kenya really need the $1.5 billion precautionary arrangements from the International Monetary Fund (IMF)?

This has been the big debate along policy corridors. I have had to re-read Tom Shorrock’s 1998 article ‘IMF and US Response to the Asian Financial Crisis’ for some perspectives.

The response, by sheer size, was billed as the largest financial rescue plan in history in which over $120 billion from the IMF, the World Bank, the US government, and other institutions went to South Korea, Thailand, Indonesia, and the Philippines to help their governments pay billions of dollars owed to US, European, and Japanese banks.

It was also meant to re-establish business confidence, and to persuade foreign investors to return to their markets.

Superficially, the intention was to supposedly save economic allies. However, implicitly, preserving the stability of the global monetary system was the ultimate prize (as global banks were stylishly cobbled into the Asian crisis).

Broadly, it was a crisis that helped frame the US dollar’s hegemony in global monetary order.

So, just who established this global monetary order?

A little history. After World War II, in an effort to free international trade and fund post-war, 730 delegates from the 44 Allied nations (“member States”) converged in Bretton Woods, New Hampshire, in 1944, and drew up a number of agreements aimed at setting up a global monetary and financial order.

Key among them was the creation of an international basis for exchanging one currency for another, to which member States agreed to fix their exchange rates by tying their currencies to the US Dollar-which marked the birth of the dollar’s hegemony.

It also led to the creation of the IMF and what is now known as the World Bank. The IMF was (and largely is still) to ensure stability of global monetary system, a role which vests it with a lender-of-last-resort powers, hence the ability to advance reserve currencies to members with trade deficits.

A reserve currency is the international unit for pricing of global commodities- such as gold, oil, corn. Governments around the world will keep large amounts of reserve currency.

To facilitate purchase of an item globally, such as oil, a country will first need to exchange its local currency into the reserve unit.

If a country’s holdings of the reserve currency, due to a burgeoning trade deficit, dwindles, it weakens its ability to buy all the tapestry needles it requires, from producing countries, to crochet its economic yarns.

READ: Sh534bn China debt now 72pc of bilateral loans pile

If the crocheting ruinously grinds to a halt, economic output, presumably, will nosedive and, as part of output leveling, the country will probably need to call the IMF for reserve currency support.

For Kenya, there is no doubt that increasing integration into the global interconnectedness exposes it to vagaries of the same.

It’s been deemed that a bouquet of unforeseen external shocks has the potential to weaken the country’s ability to continue buying all the tapestry it needs (and tilt its balance of payments).

Consequently, policymakers thought it wise to have some sort of reserve currency insurance policy with the IMF, to which the IMF gladly set some pre-conditions.

With the dollar increasingly weaponised (read Turkey), a number of countries, most notably China and Russia, are circumventing this dollar hegemony in favour of bilateral currency swap agreements.

Since 2009, China has signed bilateral currency swap agreements with 32 counterparties (according to Council on Foreign Relations), including Nigeria.

Kenya, which is increasingly exposed to China, can join this swap train. In 2017, a quarter (and counting) of Kenya’s imports originated from China.

China has also emerged as the largest bilateral lender to Kenya. In my view, a currency swap arrangement with China presents a compelling case over the insurance arrangement with the IMF.