Vital yuan lessons for Kenya shilling

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STEPHEN MUTORO

As the country wriggles under the unprecedented weight of a weak shilling and a sense of pervading helplessness persists, Kenya could borrow some vital currency “manipulation” lessons from its emerging key trading partner, China.

It is understood by many economic analysts that China’s policy of intervention to limit the appreciation of its currency, the renminbi (RMB) or yuan, against the dollar and other currencies has always been a major source of tension with US and other trading partners.

Whether or not China deliberately “manipulates” its currency in order to gain unfair trade advantages over its trading partners could be an equally different matter.

Reality, however, is that China’s undervalued currency has been a major factor in the large annual US trade deficits with China and has often contributed to widespread job losses in the US manufacturing sector.

The issue became so critical that President Obama, in February last year, felt that China’s undervalued currency had put US companies at what he called a “huge competitive disadvantage,” thereby pledging to prioritise his government’s focus on China’s currency policy.

From a public relations point of view, the shrewd Chinese government has maintained that its currency policies are intended to promote economic stability and do not negatively impact other countries.

But therein is where the secret of China’s success lies. They will go to all lengths, in a proactive way, to read and strategically act on the money and global markets long before sad realities settle in.

If a country’s economic stability, import or export-driven, has to be predictably one-way like the case for Kenya, its vulnerability against hard currencies cannot be over-emphasised.

Worse is when the country’s reactive response sees the overtures from the Executive, such as Prime Minister’s task force, seem to compete with the regulator’s Monetary Policy Committee.

Indeed Kenya’s case is not helped by the huge gambles employed by Central Bank of Kenya. It appears that for every step forward in the bid to strengthen the shilling, it is pulled back ten steps thanks to somewhat competing and often contradicting economic policies.

That is what would be difficult to notice in the Chinese case and precisely what Kenya could learn and adopt from China.

Sample this – From July 2005 to July 2008, China is said to have allowed the RMB to gradually appreciate against the dollar. Once the effects of the global economic crisis became apparent, the appreciation of the RMB was halted and the exchange rate with the dollar was held constant at 6.83 yuan.

Then China received a bashing from its major trading partners, including the US and the EU. Cleverly, China which has never run out of diplomatic excuses urged the world to appreciate its currency “protectionism.”

In June last year, the People’s Bank of China stated that, based on prevailing economic conditions, it had decided to “proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.”

From then through August 2011, the RMB appreciated by 6.1 percent. The pace of the RMB’s appreciation since that announcement has been criticized as being too slow.

Granted, economists differ as to the extent of the RMB’s undervaluation against the dollar and the economic effects that it generates on China’s major trading partners, but most agree that currency flexibility would be an important factor in helping to reduce global imbalances, which are believed to have been a major factor that sparked the global financial crisis and economic slowdown.

Reality is that currency reform is in China’s own long-term economic interest and not US or any of its trading partners.

Clearly, the US will need to save more and consume less and China would need to save less and consume more if trade imbalances were to be checked.

But the other secret could lie in Chinese industrial policies which possibly pose a much greater challenge to US economic interests than an undervalued currency.

What then are the lessons Kenya should pick from China? First, that in order to cushion the Shilling, Kenya must think long-term and suspend all the current disjointed fire-fighting which will eventually amount to so little.

The country must “forget” the regional economical blocs, the IMF and WB and attempt for some form of diplomatic “protectionism”.

Second, the country must approve its industrialisation policy which has been pending before the Cabinet. That policy must be supported by a number of macro-economic policies which will attempt to maximise on Kenya exporting finished products while reducing imports and confining them to raw materials for local processing.

For that to draw incentives, Kenya must lower the cost of production by doing everything possible to lower the cost of energy. The shortest route to this destination is to invest in the alternative energy namely solar and wind power.

Strategic links between agricultural areas and urban areas must be prioritised. Security must be enhanced countrywide to boost tourism.

Kenya may also need to make a radical paradigm shift – that both agriculture and industrialisation have failed the huge economic expectations.

As such alternatives must be sought. Those alternatives will only make sense if they are spiced by strict enforcement and compliance to good governance ideals especially in the banking and finance sector.

Compelling the industry to protect consumers through the Competition Act and the proposed Consumer Protection legislation will cap it all.

Stephen Mutoro (st[email protected]) is the Secretary General, Consumers Federation of Kenya – COFEK

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  • You are right that, “Kenya must think long-term and suspend all the current disjointed fire-fighting which will eventually amount to so little.” However, the Chinese solution might not work for Kenya for the reason that the Chinese economy is too big to ignore. Regardless of Chinese economic policy, nobody can afford to ignore the world’s second largest economy. Kenya, on the other hand, is a miniscule player which can face dire consequences for the kind of solutions you propose.

  • Senoritadoroda

    The problem with Kenya is that we think of short term solutions not long term and we wait until things are bad in order for us to act. We need to change as country.I think the inflation rate has also been contributed by the fact that the government has privatized major industries leaving the determination oil prizes to a few unscrupulous individuals who keep raising the prizes.I read this in one of our local websites at.http://www.tusijisunde.com/2011/therein-lies-the-fuel-solution/

  • RMutegi

    Stephen i would not agree with you more. Where are people like you too ask these hard questions in Parliament. Read the story below too it all makes so much sense…
    http://www.tusijisunde.com/2011/therein-lies-the-fuel-solution/

  • Kenmijungu

    I cant agree more with China on this and I hope the CBK is privy to this resourceful piece of writing, Steve good observation, i tend yo incline towards the idea of diplomatic actions, even if it means restricting the use of dollar and pounds in our trade! 

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