Govt gropes in the dark to save shilling

October 7, 2011 3:49 pm

, NAIROBI, Kenya, Oct 7 – The government still appears to be groping in the dark over what immediate policy actions it will take to shore up the weak shilling.

Recommendations made by a technical team constituted to come up with mechanisms to stop the depreciation and released on Friday failed to mention what the government intends to do in the short-term to stabilise the currency.

At a press briefing, Prime Minister Raila Odinga only referred to mid-term to long-term interventions that the government hopes will rescue the local unit that is currently exchanging at 102.35 to the dollar.

“The government will continue to hold regular dialogue with stakeholders on issues of foreign exchange and money markets to build and sustain public confidence in economic management,” the premier said of the 14 point-proposals.

The pointers were developed in consultation with members of the private sector which is facing a bleak and uncertain future with the cost of imports increasing by the day.

The International Monetary Fund is being urged to step in and support the government with between Sh25.5 billion ($250 million) and Sh30.6 billion ($300 million) to aid the tumbling currency.

An IMF team is expected in the country next week to consider the request which will enhance the current credit line which has seen the Fund agree to extend a Sh40 billion loan to help boost Kenya’s foreign exchange reserves over the next three years.

The government however maintains that the volatile exchange rate is a temporary problem that should clear within no time.

This is despite the fact that Wednesday’s four percent raise of the base rate to 11 percent had not had any impact on the shilling with the Central Bank of Kenya explaining that for the decision to have the desired effect; it needed to be supported by other supply sides actions.

“We have consulted very extensively and we want our people not to panic during this period because it is a passing phase and we are confident that things are going to normalise in due course,” the premier said when receiving the report from the taskforce.

And in what appears to be an indecisive action, Odinga said the government was keen on leaving the current exchange rate regime to be determined by the free market forces through the interbank system for allocating foreign exchange.

It was however not clear whether the government was reversing the recently announced move to side-step banks and other middlemen and sell foreign exchange directly to importers.

“We removed the government controls in the mid 90s so the foreign exchange allocation is done purely on the basis of market forces through the interbank and the point is, we have no reason to move away from that liberalised market,” was all Finance Permanent Secretary Joseph Kinyua offered.

Going that route would have very many negative implications and would also require fundamental policy changes, something the government admitted it is not ready to do.

However, it has acknowledged that it needs to cut spending which the PS disclosed would be done by for instance limiting the amount of foreign travel.

By reducing its borrowing requirements over the medium term, the government anticipates that pressure on the external current account and the exchange rate would be minimised.

Further, a fiscal consolidation is expected to reduce the debt burden to below 45 per cent of Gross Domestic Product over the medium term while the promotion of exports, increased food production and reduction of over reliance on the expensive thermal power would help tame inflationary pressures.

“It is important for the fiscal and monetary policies to be coordinated in order to ensure that the actions that have been undertaken by for instance the Central Bank are able to achieve the expected impact,” Kinyua added.

Other long-term measures include addressing the current energy deficit, increasing absorption capacity of donor funds as well as scaling up infrastructure development.

However, only time will tell whether Kenyans and the business community will get any reprieve from these actions through the stabilisation of the currency which is among the worst performers in the world having shed 25 percent of its value this year.


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