How to stem shilling from ongoing fall

Bloomberg graph tracking performance of the shilling against US dollar.

Central Bank of Kenya Governor Patrick Ngugi Njoroge is right to use the tools at his disposal to stem the systemic free fall of the shilling against the American dollar and other major currencies. His recent warning to chief executives of commercial banks against speculative trading of the local currency demonstrates just how desperate the situation is.

Unfortunately, evidence on the ground suggests his warning is not likely to be heeded because there is too much easy money to be made in shorting the shilling and banks are in a desperate race to book ever increasing profits. There is nothing to indicate any of them has the country’s long-term interests at heart. Indeed, some analysts argue, banks do not have hearts. Be that as it may.

The challenges facing the economy as a result of a weakened shilling that has fallen almost 20 per cent since the beginning of the year have been well documented. They include a sharp drop in corporate earnings which is predicted to lead to lower taxes and loss of good paying jobs. This will lead to a sharp drop in taxes meaning the government will not meet its development goals without resorting to heavy borrowing from both the local and international markets.

The realisation that the problems facing the local economy may be mild compared to the larger economies of Brazil and Russia which have been contracting over the past few years should lead Kenyan policy makers to do a paradigm shift in their thinking moving forward because the situation could get worse.

President Uhuru Kenyatta and his Deputy William Ruto may need to accept that their promised double-digit economic growth rate was based on incomplete data. This may lead them to call a round-table meeting to draft a new road map.

The proposed meeting would interrogate some of the key factors that have led the country to this sorry state. These include the continuing fall in foreign exchange earnings from tourism. The interrogation of the facts surrounding tourism would reveal that the often-cited reason for the fall in numbers is only one of the four factors influencing the sector. What should concern the President and his deputy even more is the reality that the other three hurdles can be sorted out easily and the surprise is that they have not been dealt with yet.

First, Kenya has one of the highest costs of obtaining building permits in Africa. This means investors seeking to build a hotel or lodge are frustrated to the extent of going elsewhere. Needless to say, Tanzania, Uganda, Ethiopia and Rwanda , all of whom are itching to grab what Kenya is too complacent to accommodate, are waiting in the wings.

 

Second, Kenya has the highest costs of ticket sale taxes and access to international transport services in the region. When these taxes are added to an already inflated cost of Kenya Airways ticket, the result is that tourists go to alternative destinations.

Third, Kenya is more restrictive in terms of establishing bilateral air transport agreements than other African countries including South Africa, Tunisia, Tanzania and Uganda. Incidents of Kenyan authorities denying foreign airlines permission to fly into the country more frequently are all too common.

Diesel generators

After taking a close look at tourism, the proposed meeting might turn to agricultural exports. Here it will be found that the value of exports from Kenya lag far behind those of its competitors many of whom export less volumes. This may spur policy makers to work with farmers who would be persuaded—and given incentives as necessary—to grow high value crops.

Yet another conundrum that the meeting would need to unveil is why Kenyan businesses should continue paying higher power charges despite the introduction into the grid of power generated more cheaply over the past few months. They may need to investigate whether the signing of long-term contracts with Independent Power Producers (IPPs) using diesel generators has any connection with the delayed construction of the three geothermal plants in Menengai, Nakuru County.

The three plants are estimated to cost Sh25.5 billion and would inject 105 megawatts into the grid.