×
The Standard Group Plc is a multi-media organization with investments in media platforms spanning newspaper print operations, television, radio broadcasting, digital and online services. The Standard Group is recognized as a leading multi-media house in Kenya with a key influence in matters of national and international interest.
  • Standard Group Plc HQ Office,
  • The Standard Group Center,Mombasa Road.
  • P.O Box 30080-00100,Nairobi, Kenya.
  • Telephone number: 0203222111, 0719012111
  • Email: [email protected]

Should Wanjiku lose sleep over a weak shilling?

Young Women

Predicting the value of the shilling against the dollar seems to be the most popular game in town. Few are predicting the strengthening, confirming our appetite for bad news.

The reason is simple; contrary to popular belief, a weak shilling is good for speculators, who make money buying dollars and other currencies low and selling them high. The margins are so good that if you have substantial volumes, selling foreign currency is a lucrative business. Just check the differences between selling and buying, particularly for the British pound, in banks.

Using popular wisdom from 2011, the shilling is now headed to Ndenderu in Kiambu (route 107). We hope it will not reach Kitengela (route 110) or Gikambura (route 112), Wangige (118) or even Kiambu, route 120.

What few have told us, unless in whispers, is that since 1993, our currency has been weakening against the US dollar, Japanese yen and British pound. Should we not be focusing on this long-term weakening instead of short term fluctuations?

Let us keep off esoteric graphs and equations, and ask if Wanjiku should worry about the weak currency.

The weakness is resulting from a number of factors. One is that the US dollar is strengthening because of improvement in the US economy. The slowdown in the Chinese economy could also have an effect on our currency; there might be less demand for our exports and less demand for the Kenyan shilling.

“Kenyan traders who visit China first get US dollars, which they exchange to RMB in China”, says Eunice Muthoni, an MBA student at the University of Nairobi and a frequent visitor to China.

Peace in Somalia might be reducing demand for dollars, which are exchanged into Kenyan shilling, increasing our currency’s demand and value. Lots of aid agencies are based in Nairobi or pass through there.

The weak shilling is also a fruit of terrorism attacks, which have reduced the number of tourists and their dollars, which create demand for the shilling and raise its value.

How is Wanjiku affected by weak shilling?

First, we still import lots of oil, bought in hard currency, the USD. A weak shilling means oil will become more expensive, and this has a ripple effect. Any industry that has oil as its input will be affected.

Wanjiku cannot escape this; from matatu fare to the mandazi cooked using paraffin-based cookers. A lot of businesses could use the rising price of oil to raise the prices of other commodities, leading to a general rise in inflation.

Newly imported matatus and other vehicles become more expensive because of the weak shilling. The owners could also be tempted to raise fares to recoup their costs.

Local manufacturers hit by costly imports have two options; they could raise the unit price or reduce the quality. I saw this at the Kenyan coast, where hotels are preferring an a la carte menu to the popular buffet to reduce waste and ride out the low tourist numbers.

Their other alternative is to reduce the labour cost by laying off workers (Wanjikus), because labour is one of the biggest costs in production and the most dispensable. You could make use of more casuals to reduce costs further or even use robots if you can, and Wanjiku suffers again.

Paradoxically, the workers are laid off when they are demanding higher wages because of rising inflation resulting from the weak currency. Rising inflation reduces consumer spending and could depress the economic growth, yet Kenya is becoming a consumer society. We grow the economy either by investing or spending (consumption), which creates demand for goods and services and creates jobs for Wanjiku.

Interestingly, it is the unemployed and those in low cadre jobs that are likely to suffer most from a weak currency. The affluent are often cushioned against economic shifts through diversification or even hedging strategies.

If you sell Veblen goods such as Iphones or jewels, the rising prices may not bother you much. Veblen good are those bought for conspicuous consumption, or showing off. Remember Thorsten Veblen, the Norwegian professor and emigrant to US famous for giving his students the same grade?

Foreign education becomes expensive with a weak currency; we pay fees in foreign universities in hard currencies. It becomes harder to take children abroad even through harambee. This widens the class divide between Wanjiku and the rest.

But all is not gloom; a weak currency makes exports cheaper, which could counter-balance the expensive imports. Our exports could be bought in greater quantities, and what we lose per unit could be compensated by volume. That will, however, depend on the demand for our goods, from tea to coffee.

Tourists also find our holidays cheaper, and their dollars have a trickling effect on Wanjiku, through jobs and demand for inputs such as food, if they are sourced locally. But local travel agencies find it hard to sell foreign trips or vacations because they become more expensive with a weak currency.

Investors might like a weak currency; they could find stocks cheaper and buy them off, particularly if they think the future prospects are bright. This leads to transfer of wealth. Wanjiku again.

However, a weak shilling is bad for stocks related to imports, e.g. oil companies whose demand might fall, reducing shareholders wealth. If you own stocks of firms that benefit from weak currencies, mostly locally based with lots of exports, you are better off.

Will the shilling ever become strong again?

In the short run, we can use our reserves to buy the shilling, increase its demand and raise its value. Interestingly, high interest rates strengthen the currency, as foreign money is attracted into the country, increasing the demand for the local currency. Watch monetary policy committee decision in coming days.

If we ensure security is restored and tourists return, the shilling will strengthen again. I still believe Kenya’ tourism potential is under-exploited; a target of ten million tourists would not be too ambitious.

We need a structure change in the economy, so that we can reduce our reliance on imports and balance our trade. We still need some industrialisation and to build our exports, particularly high end products, the Korean or Japanese way.

A strong currency often reflects strong economic fundamentals, which we need to build from political stability that is not disrupted every five years by polls, and an improved business environment that includes respect for property rights, great infrastructure and productive workers.

Exchange rates often reflect the collective national expectations. A strong currency makes the citizens feel good about themselves while a weak currency has the opposite effect. Think of the national mood when there is hyperinflation and the money is almost valueless.

Wanjiku may not know much about currency swaps or futures, but she cannot escape the consequences of a weak or a strong currency. Currency, after all, ties all of us together; the affluent, the poor, the urbanites and the rural folks. Currency is one thing that cannot be devolved; we share it like the air we breathe.

Despite the rise of electronic money espoused by M-pesa, the exchange rate will remain an important economic indicator because of trade. We are unlikely to have a global currency any time soon, just as we could not get a global language. How many speak Esperanto?

A stable exchange rate is desirable but the unpredictable socio-economic environment, often beyond the control of individuals and government, will often interfere with this stability.

As long as human beings with their instincts, prejudices and fears are key players in trade, perturbations in exchange rate will remain. Perhaps exchange fluctuations are like a spice; too much and too little are both bad. Striking the right balance has occupied generations of economists and we are no exception.

Related Topics


.

Similar Articles

.

Recommended Articles