BY MOHAMED WEHLIYE
The currency markets have in the past six months given us a clear warning that we have to work harder as a nation on the economy and put our acts together.
Kenyans have to get off their mindsets that the shilling is a one way street, where the currency is expected to be strong and stable at all points of time. We have to reconcile to the fact that unless the stakeholders (read politicians, businesses, regulators and the average Kenyan) work towards a stronger economy, the local currency will be weak and volatile more often than it will be strong and stable.
The recent sharp depreciation of the shilling can and will probably happen again. The current stability and appreciation of shilling should not fool us. This has largely been achieved due to tight monetary policy which is not sustainable as it would definitely hurt economic growth.
The conditional shilling’s appreciation is therefore a tactical move that lacks elongated strategic planning. The shilling’s value should rest on a sound economic output not on temporary fix such as we have now where inflow of dollars or ‘hot money’ chasing high shilling interest rates is keeping it strong. The use of interest rates to support the currency is just a snapshot and a fire-brigade approach, which at most, is an interim measure. Therefore the shilling has not arrived home safe as yet.
The Budget is around the corner and when the government’s (now two levels) over bloated budget kicks in and the price of oil possibly shoots up – as is expected this year due to tensions in the Middle East – the local currency is most likely to come under pressure once more. If we have to cope with the ups and downs of a liberalised exchange rate, the scope and sources of inflow of foreign exchange into the market must be expanded and that is possible only when the economy has arrays of products to export in order to generate ample foreign exchange. The limited source of dollar from the Diaspora and tea and coffee exports cannot do the trick and the economy with its structural imbalance cannot sustain a strong shilling.
The fiscal and monetary policies should be in tune with one another and whilst a strong currency is a reflection of a country’s economic wellbeing, a weak one is not necessarily a bad thing if the economic fundamentals are right. Most economists in fact prefer a weak currency with a low interest rate that would encourage exports and discourage imports.
But as we all know, our economy is largely import-dependent (with oil being a significant component) and a weak currency will obviously lead to inflation. We must therefore work on a long term solution that will put us in a position where we can in fact benefit from a weak currency. This means working hard in promoting a manufacturing and an export driven economy.
I recently visited a CEO friend at his offices in Mombasa Road. As we stood at his first floor office, he asked me to look outside and see how virtually little smoke was coming out of the chimneys of the factories in the industrial area. He was very concerned about how much import dependent we have become and how the factories have become warehouses for imported goods. Because of the inclement operating environment, the real sector is dwindling as manufacturers and entrepreneurs continue to move their capital away from manufacturing to merchandising and import commerce.
Almost all capital goods and raw materials are imported, such that a higher exchange rate means a rise in costs and, therefore, in product prices. Consequently, the real sector is crippled further each time the shilling crashes. The reason is that it is impossible to elicit response from a distressed real sector, which is prostrate with weak infrastructure, high interest rate, epileptic power and generally rising cost of doing business.
This means that cheap finished products often of less quality than those made in the country, from China, Middle East and other Asian countries are dumped at the country’s markets, rendering local producers mere spectators. The recent sliding rate of the shilling against other foreign currencies was therefore reward for poor planning and inability to diversify our economy, promote exports and rein on imports that are mainly for conspicuous consumption.
We can only escape from this vicious cycle if the productive sectors of the economy are revamped in order to create jobs for the people, feed the nation and export high quality goods to earn hard currencies. That means we need to put in place a long term and comprehensive planning that will bring together the executive, legislature and CBK to address the fundamentals of the economy. A good and solid productive base is an antidote to a weaker shilling.
(Mohamed Wehliye is the Vice President, Financial Risk Management, Riyad Bank, Saudi Arabia. [email protected])