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A lot more needs to be done to halt the fall of the shilling

By The Standard | July 9th 2015

At his first chairing of the Monetary Policy Committee yesterday, Central Bank of Kenya Governor Patrick Njoroge, the new governor, showed toughness and resolve in dealing with elevated risks to the inflation outlook mainly attributed to pressures on the exchange rate witnessed over the last few months.

The committee raised the Central Bank Rate (CBR) from 10 per cent to 11.50 per cent, ostensibly to check on inflationary expectations from the falling shilling, which exchanged at Sh100 to the dollar on Monday.

In 2011, the shilling hit the 107 mark against the dollar, the highest in history. Prior to the appointment of Dr Njoroge, the assumption was that the lacuna created by the retirement of the previous CBK Governor Njuguna Ndung'u made the money market jittery.

It would be naïve to expect that the mere presence of a substantive Central Bank Governor would automatically reverse the steep fall of the shilling because its value is mostly determined by supply and demand. However, the pertinent questions are: what has caused the value of the shilling to drop so drastically? What can be done to reverse this negative trend, even as some pundits claim the strengthening of the dollar by 11 per cent against other major currencies in the first quarter of the year is responsible?

Such an argument is not convincing because other economies in the region have been holding steady. The Energy Regulatory Board is set to announce the new fuel costs for the month of July. Given the trend in the past, the prices are likely to go up. This automatically translates into a higher cost of living. With a weaker shilling, the country will spend more money on importing petroleum products.

This may have the additional burden of restricting our foreign borrowing, and if it comes to that, then the Sh68 billion credit the International Monetary Fund approved for Kenya may be eaten into. There are major projects like the Standard Gauge Railway and the Lappset Project and other major infrastructural assignments that, given a weaker shilling, may end up costing the taxpayer more than the $4 billion and $3 billion initially budgeted for.

In January, Kenya's trade deficit stood at $1.8 billion against exports that only amounted to $450 million. Change of tack is needed to bring this down. As a start, transforming the economy from import-intensive into an export-intensive one could stabilise the shilling in the long run.

There is cold comfort that an expensive dollar is good for exporters. Yet on balance, this gain is lost because of the imported inputs like machinery, seedlings and fertilisers and consumables for the rising middle class.

The horticulture sector that has somehow slackened needs to be revitalised. Meanwhile, there are signs that the tourism industry could pick up momentum following the withdrawal of travel advisories. Intense marketing of Destination Kenya will no doubt act as a bulwark for the shilling against future exchange pressures. The discovery of oil will also help assuage the pressure on the shilling when oil exportation starts.

Though that could be in the distant future. In the meantime, a ballooning middle class thirsting for cars, imported accessories, fashionable electronics and at times holidays abroad, will push up the trade imbalance consequently weakening the shilling further. It could help if policy-makers were to focus on making the country a manufacturing zone and promotion of value addition to our agricultural exports.

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