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Should we lose sleep over weakening Kenya shilling?

Xn Iraki

The depreciation of the Kenyan shilling easily mimics the numbering of the transport routes in Nairobi. At one time the shilling was heading to Kikuyu, route 102. Then 125 to Ongata Rongai. It shifted direction to Ruiru, route 146. We hope it will not get to Thika, 237! 

We need to revive the use of these route numbers, it’s sentimental just like Murang’a should revive the use of locos (for location).

Jokes aside: why has the shilling weakened? There are both local and global causes. Some causes are emotional, others are real supported by fundamentals of economics. Should the value of the shilling make us lose sleep?

Some have blamed the new government for the slide in the value of the shilling. But the slide was there before. The political transition just inherited a trend.

Exchange rates fear political uncertainty. We had almost a stalemate as we went to the polls. Those with money went looking for a safe haven, the dollar. Others simply left the country. 

Uncertainty, which continued into the new presidency, naturally created demand for dollars that by extension depreciated the shilling. 

One popular view, which I believe has some truth, is that the new political establishment annoyed the ‘money people’ who decided to hoard the money, putting more pressure on the shilling. Some of us vote with ballots, others with their money. 

Beyond the juicy politics, the currency value is about supply and demand. Did reduction in debt also play a role in depreciation? Most of the borrowed money is in dollars, which must be exchanged to Kenya Shilling.

What of drought that reduced our key exports such as tea, coffee and flowers and by extension the inflow of dollars? Tourists who bring their dollars were affected by the aftermath of Covid-19 and war in Ukraine. Diaspora remittances felt the same effects.

The rising inflation made major countries like USA raise interests to curb inflation. High rates discourage borrowing, reducing demand for goods and services and by extension bringing down prices.

High rates in USA attracted money, raising the value of the dollar. The money brought through bonds had to be converted to dollars. The stimulus package in USA during Covid-19 is thought to have contributed to rising inflation.

Why has the value of the shilling not responded to government promises? It’s simple; did we increase the supply of the dollar? Others argue the deal on oil should be made public. But the value of the shilling can give us a glimpse into its effectiveness.

Some pundits have argued the shilling could be overvalued and is simply finding its true value. Like prices of other commodities, we shall get used to the new price of the shilling. What’s the solution?

We should not get solace from the depreciation of other currencies in Africa. 

Will the talks between Azimio and Kenya Kwanza reduce political tension and bring in more dollars in terms of investment? Will those hoarding the dollars release them?   Will admission by government that we have to borrow bring more dollars? Will the relative calm after demos bring in more dollars? 

The current regime loves comparing itself with Kibaki regime. Shall we enjoy the same economic freedom which unlocked our ingenuity and entrepreneurship? 

Remember the ultimate solution to uplifting a weak shilling is higher economic growth. This will create higher demand for goods and services and some inflation. The resulting higher interest could make our currency appreciate. This is sweeter when this growth is driven by exports, FDI and innovations. 

What of oil which has always put pressure on the shilling?  We can shift to natural gas, available in Tanzania. Electric cars will take time. The beauty about electric cars is that they will use renewable energy for charging which is plenty in Kenya.

Others have argued that the weak shilling cheers up exporters. That would make farmers happy; think of coffee and tea farmers. Tourists will also cheer up.  We would love this, were it not for inflation. 

In the short run, we can improve on our exports and reduce our appetite for imports. We also must increase the confidence in the economy. Majority of the population must believe things can only get better. There is too much negativity in our no longer young nation. We are 60 and counting.

How do we encourage Kenyans abroad to send more dollars? How do we bring in more FDI? Remember najivunia kuwa Mkenya?

Let’s boldly ask: could this depreciation be part of the shock therapy before our economy stabilises? 

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