I am sitted in some
café with dad having some croissant and cappuccino for breakfast when I see currencies’ exchange rates
on the TV on business news. Partly motivated by a biiiig International Finance
document I have been reading, I hunch over my iPad and compose this write-up. The
Kenyan shilling has been depreciating against the dollar overtime. I grew up a
young boy, seen the dollar sell at around 36bob, (CBK website says it was trading at US$1/36.23Ksh in Jan 1993). I
have also seen this rate hit an all-times high of Ksh105.75/US$ (Oct2011), and
now stabilized at around US$1/86Ksh.
There are several
explanations for currency depreciation. First, the persistent rise in prices-inflation
(explained by the theory of purchasing power parity). Second, the National
Trade Deficit (imports exceeds exports). As the trade deficit
increases, the value of a country’s currency depreciate against the currency of
the countries it is trading with. Third, the Monetary policy- (economic money supply). The Central
Bank adjusts monetary policy in order to find equilibrium between the supply
and demand by either printing more money or selling government owned
securities.
Economists
Ben Bernanke, Arthur Laffer, Dr. Aballa or me will tell you that currency
depreciation is not necessarily a bad thing for an economy/country.
A weakening shilling…
Depreciation
of a currency makes a country’s exports cheaper (theory of purchasing power
parity) and therefore more competitive in the international markets (price
leadership). Remember when the shilling hit a past US$1/105.75Ksh mark? Kenya
has had currency depreciation that would have been good for the economy,
swiftly, greatly, tremendously and absolutely!
But
why were/are we not on the streets dancing?
A check on our Capital
and Current Accounts (BOP) shows a deficit. Kenya brings in more goods than we
export thus a weak shilling leaves our county’s wealth worse off, that’s why we
are not in the streets dancing as the shilling depreciates even more.
More exports are good
for a country. They not only improve the balance of payments-(BOP) but also
increase the country’s economic wellbeing. A growing economy (due to more
exports) coupled with good re-distribution policies should be good for all.
Indeed, good to even the unemployed like me as well.
But can our good
taxation system or fair redistribution policies change our current situation? No,
I won’t bet.
Even if there was a
surge in demand for our Kenyan exports in the international markets, we are
limited on how much we can supply within a given time. We have limited capital
and inputs to expand production. Land too is limited.
The benefits derivable
from currency depreciation are complicated by the fact that we are net
importers!
Worse still, most of
what we import consists of basic capital equipment, and other basics like food
items. Can we really do without imports? The answer is NO. No man is an island.
Therefore, given the depreciating shilling and the basic necessity to import;
all of us are inevitably hurt due to high import prices, which should not be
the case.
But we still got a way
out!
The solution to the pun
above would be to address supply constraints within the economy. Kenya can
produce. Kenya can value-add her local products. Kenya can manufacture some
products she has been importing. Kenya can export too. Kenya can make her BOP
positive. Kenya can ensure increased and sustained supply capacity, competitive
domestic pricing as well as increased capacity to meet surges in demand within
and without the international markets.
And for this to work,
there should be a reasonable openness in the economy and political policies, a
relatively floating exchange rate, credit and a reduced risks of investments.
Let me resume my croissant, with
the already cold cappuccino.
