Invisible
Robot
- Feb 11, 2006
- 9,075
- 7,878
By JAINDI KISERO
Panic has gripped the financial markets. The Kenya shilling is on a free fall. And, within the private sector, debate is raging as to whether or not the Central Bank of Kenya should intervene to prevent the downward spiral of the currency.
I agree with the Governor of the Central Bank when he says that the big factor here is speculation. Indeed, our money markets have taken a major beating from the hysterical coverage of the scary goings-on in the international financial markets.
The media has been feeding markets with a persistent gloomy tales of falling share prices and plunging stock-markets, in the process, influencing panicky behaviour.
Scare-mongering has almost become a normal aspect of financial markets.
How, exactly, is the speculation taking shape? If you are a manufacturer who knows that you will be importing intermediate goods or raw material from Europe six months from now, you will be advised to buy as many dollars as you can now and to deposit them in your forex account for future use.
If you plan to import a car from Japan, traders will tell you to stock the dollars now. Currency dealers and traders have speculated that the price of the dollar will rise higher and higher, and are consistently sending the message to their clients to "fly to safety".
And, traders holding surplus dollars are hoarding the greenback in line with their predictions of looming shortages of the currency.
Is Kenya more vulnerable than other countries? Can the fall of the shilling be said to be a reflection of the prevailing conditions in the macro-economy? Is there something we are not doing right?
The answer is no because the strengthening of the dollar against other currencies is a global phenomenon.
Consider the following examples: Since October 1 this year, the shilling has depreciated against the dollar by 9 per cent.
The Uganda shilling has fallen by 18 per cent while the Tanzania shilling has depreciated by 12 per cent. The South Africa Rand has been hit hardest, plunging by a bigger percentage.
Clearly, the fall of the shilling is not based on fundamentals. It is more a product of panicky behaviour and speculation.
I say so because all the statistics show that we are not exactly without dollars in this economy. According to the Central Bank, we have a healthy current account and plenty of dollars within the banking system.
Central Bank says it is holding dollars worth four months of imports. Statistics show that we have reserves of about $3 billion.
Statistics also show that the stock of foreign exchange held by commercial banks is at its usual average of $15 billion, showing no signs of stress.
Governor Njuguna Ndung'u should hold his ground and resist pressures to intervene in the marketplace. If he intervenes in the market now and starts buying dollars aggressively at below market prices, the dollar will, indeed, come down.
However, the flip side is that such a move will be counter-productive from a macro-economic standpoint.
It more or less amounts to indirectly subsidising the big private sector consumers of dollars such as oil companies, at the expense of farmers who will need fertiliser, and the sick who will require medicine.
In any event, we are right now living under very uncertain international financial market conditions. You have to be very thrifty with the dollars you have. As a matter of fact, what the Central Bank is holding in reserve is the statutory limit.
Thus, the priority now is for the Central Bank to conserve the money we have for buying food, imports and for servicing our international debt obligations.
The Central Bank should not agree to be influenced by short-term calculations and self-serving predictions of speculators.
Without doubt, what is happening to the shilling now will have major implications for the flow of trade within the countries of the East African Community.
Three weeks ago, on October 1 to be exact, one Kenya shilling would fetch 23 Uganda shillings. Today, one shilling will get you 25 units of the currency.
Three weeks ago, the Kenya shilling would fetch you just under 16 Tanzanian shillings. Today, a Tanzanian wishing to buy goods from Kenya needs just over Sh16 to buy the same unit from Kenya. Goods from neighbouring countries have become much cheaper.
What are the policy implications for the falling shilling? The Government should improve on its communication.
The Ministry of Finance and the Central Bank need to convey the decisions they are making in a more effective manner to allow a situation where market expectations are based on a firm ground.
Source:
Panic has gripped the financial markets. The Kenya shilling is on a free fall. And, within the private sector, debate is raging as to whether or not the Central Bank of Kenya should intervene to prevent the downward spiral of the currency.
I agree with the Governor of the Central Bank when he says that the big factor here is speculation. Indeed, our money markets have taken a major beating from the hysterical coverage of the scary goings-on in the international financial markets.
The media has been feeding markets with a persistent gloomy tales of falling share prices and plunging stock-markets, in the process, influencing panicky behaviour.
Scare-mongering has almost become a normal aspect of financial markets.
How, exactly, is the speculation taking shape? If you are a manufacturer who knows that you will be importing intermediate goods or raw material from Europe six months from now, you will be advised to buy as many dollars as you can now and to deposit them in your forex account for future use.
If you plan to import a car from Japan, traders will tell you to stock the dollars now. Currency dealers and traders have speculated that the price of the dollar will rise higher and higher, and are consistently sending the message to their clients to "fly to safety".
And, traders holding surplus dollars are hoarding the greenback in line with their predictions of looming shortages of the currency.
Is Kenya more vulnerable than other countries? Can the fall of the shilling be said to be a reflection of the prevailing conditions in the macro-economy? Is there something we are not doing right?
The answer is no because the strengthening of the dollar against other currencies is a global phenomenon.
Consider the following examples: Since October 1 this year, the shilling has depreciated against the dollar by 9 per cent.
The Uganda shilling has fallen by 18 per cent while the Tanzania shilling has depreciated by 12 per cent. The South Africa Rand has been hit hardest, plunging by a bigger percentage.
Clearly, the fall of the shilling is not based on fundamentals. It is more a product of panicky behaviour and speculation.
I say so because all the statistics show that we are not exactly without dollars in this economy. According to the Central Bank, we have a healthy current account and plenty of dollars within the banking system.
Central Bank says it is holding dollars worth four months of imports. Statistics show that we have reserves of about $3 billion.
Statistics also show that the stock of foreign exchange held by commercial banks is at its usual average of $15 billion, showing no signs of stress.
Governor Njuguna Ndung'u should hold his ground and resist pressures to intervene in the marketplace. If he intervenes in the market now and starts buying dollars aggressively at below market prices, the dollar will, indeed, come down.
However, the flip side is that such a move will be counter-productive from a macro-economic standpoint.
It more or less amounts to indirectly subsidising the big private sector consumers of dollars such as oil companies, at the expense of farmers who will need fertiliser, and the sick who will require medicine.
In any event, we are right now living under very uncertain international financial market conditions. You have to be very thrifty with the dollars you have. As a matter of fact, what the Central Bank is holding in reserve is the statutory limit.
Thus, the priority now is for the Central Bank to conserve the money we have for buying food, imports and for servicing our international debt obligations.
The Central Bank should not agree to be influenced by short-term calculations and self-serving predictions of speculators.
Without doubt, what is happening to the shilling now will have major implications for the flow of trade within the countries of the East African Community.
Three weeks ago, on October 1 to be exact, one Kenya shilling would fetch 23 Uganda shillings. Today, one shilling will get you 25 units of the currency.
Three weeks ago, the Kenya shilling would fetch you just under 16 Tanzanian shillings. Today, a Tanzanian wishing to buy goods from Kenya needs just over Sh16 to buy the same unit from Kenya. Goods from neighbouring countries have become much cheaper.
What are the policy implications for the falling shilling? The Government should improve on its communication.
The Ministry of Finance and the Central Bank need to convey the decisions they are making in a more effective manner to allow a situation where market expectations are based on a firm ground.
Source:
