Mbaru roots for control of capital flows

January 4, 2012
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, NAIROBI, Kenya, Jan 4 – A financial expert is calling on the government to restrict how foreign traders channel their investments in and out of the country, saying the current trend has ended up benefiting a few people at the expense of the masses.

Renowned investment banker Jimnah Mbaru says the government should borrow a leaf from Asian countries that have various models such as capital controls and monitoring flows.

He recommends that Kenya could then adopt a mix of options that can help it maximise the benefits of an open market while at the same time shielding the country from potential risks.

“I think there may be time and opportunity to review the situation. I think we need more facts, we need to look at the data a little more closely before we can make a proper policy statement,” he advised.

Currently, Kenya lacks a policy on capital account primarily because it tries to set itself apart as the most liberalised economy in the East African region so as to attract investments into the country.

But while this stance has worked by enabling the country to attract some capital flows, it has also been detrimental to the economy.

For instance, between 2003 and 2007 the country witnessed a boom in the Nairobi Stock Exchange (NSE) which grew by 400 percent; an explosion that was attributed to the high involvement of foreign investors who came into the country in droves to take advantage of the significant economic growth.

The exchange rate was also affected as it suddenly appreciated and impacted the country’s exports.

The events that followed the bungled 2007 General Election however saw the investors pull out and they have since largely stayed away from the market due to both internal and external economic developments that have consequently also contributed to poor performance at the bourse.

A lot of volatility has also been seen on the local unit front since 2008.

A United Nations economist Charles Abugre argues that the near crash of the stock market after such a robust rally is driven by the fact that most of these investors are always looking to make a quick buck and hardly invest in long term projects. They tend to get their money out of the country at the first sign of trouble, he points out.

“There has been a lot of flow of money into the stock market and that is why there was a boom and in my view this is also what fuelled the housing boom. Short money flows in quickly but it also flows out rapidly. It comes in hot and goes out hot,” he said at an earlier interview with Capital Business.

“The fact that it is possible to rapidly transfer capital in large quantities abroad suggests that the liberalisation of the capital account cannot only be a means of attracting investment but also a means of rapid disinvestment which can then create a massive problem,” Abugre said.

This ability to move money in and out of the country without any restrictions has further fuelled illicit capital flight which a recent report estimated to have accumulated to Sh541.3 billion ($6.36 billion) in 2010.

“A number of economists have singled out portfolio diversification motives, political and macroeconomic instability -particularly conflicts and macroeconomic volatility-, fiscal deficits, and expected devaluation of local currencies, as some of the root causes of capital flight,” documented the report titled ‘Bringing the Billions Back’ published a Swedish democracy and rights organisation Forum Syd.

However, it also cited other factors such as tax evasion by multinationals, corruption and poor governance as other causes of this vice.

Many economists concur that it is such policies that the government has adopted that have made Kenya so vulnerable to the perennial balance of payment deficit and the swings in interest rates and the local currency.

This, they say makes a case for the tightening of the rules in order to insulate the economy from external shocks.

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