When one goes to the market, to buy or sell a product, (s)he always has a means of exchange. In most instances, the medium is usually money. In the forex market, the good to be exchanged is the money itself. Since there is no universal currency for exchanging money, trade in this market is barter, and the universal consideration is the value of the money.
The United States of America is the economic super power of this time, making the US Dollar the most circulated currency in the world. When a country, say Kenya, wants to buy goods from Mexico, they would have to get the Mexican Peso. Since it is difficult to get the Peso, most countries would use the dollar instead, because chances are high that they will trade with it.
Kenya, same as most countries across the world, uses the USD to measure its currency. Being a net importer (imports more than it exports), the country is in a position where it constantly seeks the dollar.
The falling Kenyan shilling
During the first term of President Kibaki, the shilling barely touched the kshs 70 against the dollar. The Post Election violence of early 2008 saw it loose ground slightly, and it has struggled to recover since.
However, between August and October 2011, the shilling lost ground from kshs 80 to as low as kshs 107 against the dollar. This is a very sharp drop given the two month period, making the Kenyan shilling the second worst performing currency in the world. Question is, what does the falling shilling do to us?
Consequences of the fall in value
The shilling has resulted to high production costs for businesses that rely on inputs from it. One of the reasons given by telecommunications leader, Safaricom, for hiking its prices was that the equipment they ordered from abroad have automatically increased in value. Companies that had ordered inputs before August will have to absorb such costs, unless they hedged such contracts.
Instability in the currency has also caused inefficiency in budgeting processes. According to the Business Daily, Financial Directors are under increased pressure to revise their budgeting processes to tally with market dynamics.
The economy at large is bound to suffer, since the country imports more than it exports. In the end, this will result in inflation and increased cost of living in the country.
It is however not doom for all players in the economy. Tea and coffee farmers are laughing all the way to the bank, since they receive more money for the same quantity of exports. The falling shilling also provides greater opportunity for growth of local industries, as consumers are bound to prefer cheaper locally made products to the more expensive imports.
Reasons for the falling shilling
Until now, there is no universal reason for the sharp fall in the shilling. In early July, arguments were that the shilling was falling in response to the Eurozone crisis, which resulted to increased demand of the dollar in the global economy. Although most players in the global market called for interventionist policies by the regulator, the Central Bank, its governor was reluctant, claiming that it would soon stabilize.
It defied its predictions, falling further by the day. Appearing before the Parliamentary Finance Committee, Prof Njuguna Ndung’u claimed that the falling shilling was a result of five major banks hoarding the foreign currency. The Treasury has since denied any knowledge of such information.
Latest attempt to stabilize the shilling
This month, the Central Bank claimed that it had done all it could to stabilize the shilling. The onus now was on the Treasury to rescue the currency.
In other levels the government have tried to rescue the shilling, with the President holding a high level meeting to address the crisis and the Prime Minister setting up a technical team to mitigate the effects.
The Minister of Finance, Hon. Uhuru Kenyatta, made a public statement concerning the reactionary measures of his ministry that were received positively, and stemmed the fall. Among them was the plan to take a loan of $600 million to increase supply of the dollar in the economy. IMF chief Christine Lagarde is expected in the country to sign the deal, but she was preceded by a technical team which is currently discussing the specifics with Treasury.
The way forward
The shilling remains at rest at the kshs 107 mark. The market has currently adopted a wait and see attitude in anticipation of the IMF deal, and other measures by both Treasury and the Central Bank. Until that time, our fingers should remain closed!
Denno Nyanja
No comments:
Post a Comment