Market vs politicians: Who will determine the true value of resurgent shilling?

The Kenyan shilling strengthened after Eurobond issuance. [Wilberforce Okwiri, Standard]

This is the golden age of economists, the high priests of social sciences.

Unlike “hard” scientists, biologists, physicists or chemists, economists rarely experiment. The variables they deal with would be hard to manipulate.

For example, you can’t deliberately tax people to see how much revenue you can raise. Neither can you lower interest to see how joblessness will behave. 

Participants could realise they are part of an experiment and behave in unexpected ways. 

“Hard” scientists have that liberty; they can manipulate variables to see the effect on another variable. If you heat a piece of metal, it expands. If you add a dye to water, it diffuses, and if you mix magnesium and water, it will result in an explosion.

This direct observation, use of data and replicability give science its character. Humanities admire the methods of hard science to the extent of declaring themselves social sciences.  

They use scientific methods in their search for knowledge. Human subjects complicate their quest to be “scientific.” 

So, why is this economist’s golden age? Policy shifts after Kenya Kwanza (KK) came to power are our free experiments. Data is also freely available.

We just need to be patient and see the outcome: it takes time to get the effects of manipulating one variable on another in  “economic experiments.”

Do these “experiments” in KK policies reflect the influence of academics in the ruling coalition’s inner circle? 

For instance, a rise in tax rate should lead to higher tax revenue if we haven’t reached Laffer’s optimal tax rate.

This rate is unknown, just like the shilling’s equilibrium exchange rate. But we have to wait and collect revenue to compare with the previous years.

You could also raise interest rates and wait to see if the currency will appreciate. While over time we have had economic laws that demonstrate relationships among variables, context complicates the relationships. Our traditional proverbs surprisingly mimic several economic laws. 

In context, is the economy open, democratic, highly regulated or has a strong central bank?  Enough digression. The hottest economic experiment is fascinating - who will have the last laugh on the shilling’s appreciation, the politicians or the market?

Any economist should be smiling. The two are the independent variables. The dependent variable is the value of the shilling against the dollar.  

Politicians predicted a rate of dollar to Sh100 from a high of Sh160. They have pronounced themselves. They have even advised us to sell off the dollars to avoid losses. Their timing was very coordinated.

President William Ruto and his deputy Rigathi Gachagua have a good reason to try and shore up the shilling.

It will give them political credit. Think of the fall in inflation as fuel becomes cheaper, with a stronger shilling.

Add the reduced debt burden. Why would politicians not smile? Remember the cost of living and debt have been political hot potatoes.  

For a few days, politicians seem to have succeeded in swaying the shilling, building on Eurobond repayment when the market reacted positively. I will say it again, that was politically smart. 

Let’s be fair to the government, avoiding a default was a smart thing to do, though costly. The Eurobond will still be repaid. If the economy grows, repaying will be easier. We could even have another government sort out the bond. That is why debt is popular with politicians or governments; you pass it on to the next regime or the next generation. Tax is instant and everyone feels the pain. 

However, economic fundaments did not change significantly after the Eurobond repayment after we replaced a cheaper debt with a more expensive one. The supply and demand of both the dollar and shilling do not seem to have significantly changed. Was there an influx of dollars through Foreign Direct Investment (FDI), remittances, foreign loans or aid? Did the rise in the interest rate reduce the supply of the shilling and draw in more dollars so fast? 

Efficient market hypothesis says you can’t beat the market. The market quickly processed all the information available after Eurobond repayment, separating noise from useful information.

And true to this, the slide of the shilling towards the Sh100 mark has slowed or even reversed. My prediction last week that the shilling would stabilise between Sh135-150 to the greenback has held. Should I adjust the new limits to Sh140-155? So far, the Central Bank of Kenya (CBK) has not identified the equilibrium exchange rate despite saying it had overshot its equilibrium.

Have we left the market and politicians to find out the equilibrium value of the shilling?  

We can assume it’s economic half-time, and the market has so far won against the politicians. Will the match be abandoned or go to the second half? 

We are waiting. Does any of the contestants have any secret weapon? 

The referees are economists, financial analysts, and CBK. The cheerleaders are the rest of us, who suffer the ravages of a weak shilling. Where do you place the International Monetary Fund (IMF)? 

Finally, the final equilibrium rate may not be known for now. But the rate stability matters more.  

A stable exchange makes it easier to make economic decisions at household, national or global levels.