Politics of weak Shilling

The worrying performance of the shilling has drawn the attention of every Kenyan, economists and laypersons alike.

Many opinions have pointed at the desire for a stronger currency, mostly for sentimental, prestige or ego purposes without economic justifications.

Apart from the obvious advantage to exporters, however, it may be interesting to also observe that the shilling has probably been overvalued for a long time at least when viewed in the context that there is no fundamental reason why, relative to other East and Central Africa currencies. The Kenyan unit has been exchanging at low rates against other major currencies.

Kenya, like its neighbours, is mainly a primary producer and exporter of agricultural products, mainly unprocessed, and an aspiring tourism destination without much else to offer. Actually, Uganda’s potential as an oil producer puts it in a better position in economic sense to enjoy better exchange rates .

Theories about the movement of the shilling abound. None of which seem plausible enough to offer a comprehensive explanation. Some have blamed the banks for engaging in speculative practices that encourage hoarding. Others think the Central Bank low rates regime could be backfiring while still others contend that unchecked Government spending has put too much money in the economy.

An interesting theory, however, is that this is a deliberate move by the Government. Proponents of this theory argue that, in an effort to make the country more attractive to investors, and increase exports, the Government has engaged in a covert and systematic devaluation of the local currency.

West versus East models

Those bent on propagating this line of thought opine that you only have to observe and consider President Kibaki’s modus operandi since he came into power in 2002.

He, and without reservations, has consistently modelled his economics along those of the East. He has had a deliberate shift from Western prescribed models.

He also has not hid his fascination with China. He has continuously advocated stronger bilateral ties and publicly commended China’s friendship with Kenya. That also means he has taken his time to study China’s ‘miracle’.

As a result has became a good student of the same — remember he is reputed to have been an ‘A student’ at Makerere University where he studied Economics.

Massive benefits

Looking at China’s economic model, therefore, they argue, would explain his approach and, by extension, the behaviour of the shilling. China has consistently favoured a devalued currency against world’s major currencies.

The West, particularly the US has consistently accused Chinese Government of interfering with market forces in determination of exchange rates.

Interesting, however, is that China’s approach has brought about massive benefits to its economy. It is the only economy in the last decade that has consistently achieved impressive expansion year after another.

Also, as a result, investors have flocked into the country in their numbers.

Actually, Americans are complaining of jobs that have been exported to China and other Asian countries like India as a result of industries relocating their plants or outsourcing from there.

Proponents of this theory argue that Kibaki being an ‘A student’, is seeking to outdo China in devaluation of the currency.

Anyone listening to this kind of posit is likely to believe, especially when put in the context that he has always strived to portray economic performance as his preferred front. Indeed, he has been accused of neglecting the political front.

Also notable is the fact that, the CBK governor professes economics, yet he appears in public to be totally clueless of the behaviour of the shilling. It is hard to believe him.

It is amazing the Government proposed solution by Finance minister is emphasizing austerity measures, without explaining why it has suddenly become the buzzword, and how such measures can work in the short run. It is like saying, ‘get used to a devalued shilling.’