Kenya: Last week’s depreciation of the Kenyan shilling against the international hard currencies after a long period of stability is a source of worry and concern to many.
What the Central Bank of Kenya should avoid is a situation, as happened in 2012, which gives room for speculative buying of the greenbuck. Currency fluctuation is nothing unusual.
As a rule, in a floating exchange-rate regime, the CBK will not determine the exchange rates. Indeed, following the liberalisation of the Kenyan economy over two decades ago, the local currency’s exchange rate is largely left to be determined by market forces. But that is to mean that the CBK is entirely unable to shore up the shilling.
In exceptional circumstances, where the depreciation or the over-appreciation is caused by non market factors, the CBK in consultation with other stakeholders can take remedial measures to guarantee stability. On Friday, there were jitters in the market after dealers reported that the local currency had been forced to touch Sh88 to the dollar due to the increasing demand for hard currencies, especially the US dollar.
Kenya is a net importer of goods. That means any little depreciation will hit the economy hard and the effect will take long to reverse. It is hoped that the reported depreciation will be short-lived and the effects will not linger for too long.
Though the short-term focus will be on CBK’s action, the long-term solution to addressing uncalled-for fluctuations of the local currency hinges on the Government providing clear-cut policy measures on how it intends to deal with the threat of terrorism, general insecurity and wooing more investors and nurturing a vibrant tourism sector.
No doubt, the shilling’s depreciation has largely been caused by the effects of the sporadic terror attacks experienced in various parts of the nation and the negative travel advisories from the country’s key tourism source markets, especially Europe and America.
Considering that the advisories came during the onset of the high season for tourists, when the visitors bring in millions of hard currency in foreign exchange, it is no surprise that the local currency is under pressure.
It is for this reason, we believe, the CBK should be more alert and vigilant to protect the economy from possible negative effects of the severe attack on the shilling, even as it facilitates market forces to also drive the process as expected in a liberalised economy.
Yet in each of the scenarios there are winners and losers, and that is why stability is key. That is why CBK must ensure balance is maintained, and that both importers and exporters benefit.
The CBK has endevoured to maintain a competitive exchange rate that takes into account the interests of both exporters and importers. In this regard, movements in the exchange rate serve to correct any imbalances in the market.
The silver lining is that a weak shilling means lower foreign prices for our exports; this increases the country’s competitiveness in the world market, which improves our balance of trade position. Further, a weak shilling promotes domestic investments that create employment and also discourages final consumption of luxury imports. All these are necessary to improve the current account balance and support economic growth.
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