Understanding complex impact of a weak shilling

The weakened shilling also incentivises the hoarding of dollars, creating a self-perpetuating cycle. [iStockphoto]

If you are a frequent traveller or involved in international trade, the depreciation of the Kenyan shilling carries significant implications. To understand this economic phenomenon, let's delve into mathematics - a subject often remembered by many for its complexity and perhaps a teacher whose lessons failed to illuminate its future relevance. Do you recall their nickname?

Imagine a scenario where the shilling weakens from $1 to Sh100 to 150 shillings. This shift has tangible consequences; for instance, an air ticket priced at $1000 now costs $1500 — a 50 per cent increase in a short period. The question arises: which business can effortlessly boost its profits by 50 per cent in such a short time?

For those involved in imports with $100,000, a currency depreciation demands an additional $5,000,000. The weakening shilling isn't a theoretical debate; it's a harsh economic reality affecting us all.

The repercussions extend beyond those directly involved in international transactions. When import prices rise due to a weak shilling, entrepreneurs respond by increasing prices. However, this isn't a proportional adjustment. If the shilling weakens by 50 per cent, prices might surge by more than 50 per cent, making new taxes an oddly welcomed strategy for some.

Even if you've never held a dollar, the weakened shilling affects you. Consider that oil, a crucial import, has been increasing in price even before the shilling's decline. While exporters might benefit, Kenya remains a net importer, intensifying the economic impact.

The situation becomes even more critical when examining our national debt, primarily denominated in dollars. If the shilling depreciates by 50 per cent, the debt's value in Kenyan shillings surges by an equivalent percentage. This prompts the daunting question: how do we generate the funds to pay off this inflated debt?

So, how did we reach this economic crossroads?

External factors, such as global economic dynamics and disruptions like the Ukraine war, play a role. Internally, the political transition in 2022 introduced economic uncertainties, leading to capital outflows. Investors withdrawing funds, often in dollars, increase the demand for the Ksh, contributing to its devaluation.

The weakened shilling also incentivises the hoarding of dollars, creating a self-perpetuating cycle. Additionally, the demand for dollars to settle debts further strains the shilling's value.

The recent declaration by the Central Bank that the shilling is overvalued adds another layer of complexity. Does this signify a self-correction or hint at past exchange rate manipulations?

The consequences of a weakened shilling are compounded by increased taxes, leaving the population disgruntled. This discontent, while politically useful, masks the deeper economic challenges.

In essence, the weakening of the shilling isn't confined to economic jargon; it has real and immediate implications for individuals, businesses, and the country as a whole.

As we navigate this economic terrain, external factors remain beyond our control, turning our attention to internal strategies. Building confidence in our economy through effective policies can reverse capital outflows. Enhancing productivity, stability, and managing inflation are key areas that require attention and concerted efforts.

Understanding the intricacies of a weakening shilling involves not just economic but also emotional, political, and even sentimental considerations. The path forward requires a delicate balance of policy adjustments, economic reforms, and a steadfast commitment to stability.

Where to go from here?

The Kenyan economy finds itself at a critical juncture, grappling with a weakened shilling and its far-reaching implications. While external factors may be beyond our control, internal strategies can be leveraged to instil confidence, attract investment, and foster economic stability.

The weakening shilling isn't merely an economic woe; it's a call to action for policymakers, businesses, and citizens alike. The path forward involves addressing economic fundamentals, boosting productivity, and navigating the intricate web of global economic dynamics. As we confront these challenges, the resilience of the Kenyan economy will be tested, and the decisions made today will reverberate in the economic landscape for years to come.