Kenya needs to rethink allocation, pricing of scarce foreign exchange

Kenya’s foreign exchange situation is nearing a level last experienced in 1981/82 when the country faced a devastating shortage of foreign exchange.

Global oil prices had suddenly tripled, with petroleum import accounting for over 30 percent of Kenya’s import bill, a situation that crowded out other sectors that deserved foreign exchange.

Unlike today the Central Bank of Kenya controlled and allocated foreign exchange to every user while also setting daily trading exchange rates.

Today Kenya is experiencing foreign exchange deficits mainly due to historical foreign debts at a time when the country is importing massive volumes of food to respond to a devastating drought.

Allocation of foreign exchange resources is today delegated to commercial banks which are conflicted by beneficial interest in forex trade.

They decide how much, to whom, and at what cost dollars are allocated. At a time of forex emergency, these decisions should be with an independent agency.

I am not in any way advocating a return to foreign exchange controls, but smart guidelines are certainly needed to prioritise the allocation of limited forex resources at recommended maximum currency rates.

Allocations should prioritise essential imports (medicines, fuels etc.), sectors that generate foreign exchange, and programmes/entities that reduce forex requirements through local substitution.

The banks should be issued with schedules of prioritised allocations based on sound policies which encourage local production and reduced imported consumption.

Agricultural inputs (fertilisers, machinery etc.) should be prioritised as these will reduce food imports while supporting export crops.

Specific programmes should be enacted to reduce petroleum consumption. Electric transportation (buses, bodas, taxis) and city rapid transport programmes should be accelerated to reduce imported fuels.

Brave decisions are also needed to limit power generation using imported fuels.

In the petroleum sector, I see the ongoing dollar unavailability and expensive exchange rates creating supply chain disruptions, a situation that can be averted by prioritising dollar allocations to the sector.

This is as the government plans to phase in 30 percent of government-to-government imports, a process that may take time as the capacity and systems to handle the imports are developed.

Finally, I believe the government has an obligation to rule on a maximum exchange rate that banks sell their dollars, which is necessary to rein in inflation.

A profit spread of nearly Sh10 on a dollar looks morally wrong at a time when the country is experiencing economic hardships.

Indeed the Treasury should consider a windfall tax on profits specifically earned by banks from ongoing currency trading.