Kenya needs bold and broad economic thinking
- When traders hesitate to speak up it is usually that we are entering a period when players will be more interested in short term calculations.
- In the coming weeks, the Monetary Policy Committee of the Central Bank of Kenya will need to show more dexterity in managing the speculative forces that are sure to explode, especially in the run-up to the elections.
With a widening current account and pressure on our hard currency starting to build up due to large upcoming external debt repayments – and the country entering a high-stakes general election – it shouldn’t be surprising that we we were starting to see speculative pressures manifest. to be applied to the local currency.
If you are going to buy dollars today, it is likely that you will see big differences between the rates offered to you in the banking room and the rates quoted in the open market.
We are in an environment of information asymmetry. I telephoned several forex traders and treasury managers at the major banks for explanations of these pressures on the shilling. The standard response has been tight-lipped. When traders hesitate to speak up it is usually that we are entering a period when players will be more interested in short term calculations.
In the coming weeks, the Monetary Policy Committee of the Central Bank of Kenya will need to show more dexterity in managing the speculative forces that are sure to explode, especially in the run-up to the elections.
Yet we also have to agree that the fundamentals don’t look good. Our export sectors have been underperforming for several years. Indeed, exports to GDP have remained stable for several consecutive years.
Income from tea, coffee, tourism and horticulture has historically been low. The recent collapse of the tourism industry has made matters worse.
On the other hand, the value and quantity of imports have increased exponentially. Diaspora remittances are about the only place where we see significant growth in the export sector.
Along with the large investment in infrastructure projects that we have implemented, there has been a huge increase in the demand for dollars to finance imports of steel and heavy machinery.
We export huge amounts of dollars to pay Chinese contractors and to service expensive syndicated loans and Eurobonds.
External factors also intervened. Internationally, all indications are that the US dollar has strengthened and continues to exert pressure on the currencies of all of its trading partners, including Kenya.
Indeed, recent statistics now show that the United States has become Kenya’s third largest source of imports. At the regional level, the weak performance of our economy compared to its neighbors has led to an appreciation of their currencies against the Kenyan shilling.
We must put pressure on the presidential candidates to go beyond filing lists of so-called flagship projects and to give us clearly quantified plans of what they want to do.
We are at a point where what we need most is bold and broad economic thinking. In the air, you neither sense nor smell the anticipation of a new direction in economic policy. Indeed, the development of economic policies in this country has become lazy and unpredictable. Take this ritual of the annual budget speech, for example.
When you read the budget statements or even the fiscal policy statement, it’s basically about spending a few billion more on roads, ports, electricity, railways, housing, and police vehicles, and the salaries of the Kenya Defense Forces and teachers.
Economic policymaking has turned into taxing and extravagant spending, with the IMF and the World Bank encouraging us and telling us not to worry.
We know that agriculture remains the backbone of the economy. But in terms of budget allocations, the lion’s share of spending will still go to megaprojects ostensibly aimed at improving infrastructure. Part of the problem is the failure of the institutions that run the economy.
Public finance management is in total disarray at both the national and county levels. Our line ministries and departments are unable to produce regular accounts. This is why we are having difficulty with the functioning of the Integrated Financial System (IFMIS) and why the Treasury is unable to implement the proposed Single Treasury Account.