The last time it hit that level was in 1994, when Cabinet minister Prof George Saitoti presided over the Goldenburg ‘raid’ at the Treasury that brought this great nation to its knees. It cooled off his State House ambitions for the next two decades.
This time round, Uhuru’s ‘hands off’ policy over the Central Bank may just be his Achilles’ heels. CBK Governor Njuguna Ndung’u has run out of ideas, and is at best confused, as reflected in his policies on the currency in the past three months. He has blamed speculators, banks, low interest rates, current account deficit, global turmoil and just about any reason he can find. The shilling has lost a quarter of its value this year and Ndung’u’s reactions have not helped build confidence in the money market.
The impact of CBK policy failure is awesome. The economic growth will certainly dampen, putting breaks on job and wealth creation in the long term. Prices will increase, raising the cost of goods and services and making survival more difficult for most Kenyans. Already, energy costs are likely to go up by 30 per cent according to the Ministry of Energy. Manufacturers and producers are already warning of higher consumer prices. The resultant high cost of production will erode our global and regional competitiveness. The weaker shilling may lead to capital flight as investors seek better value elsewhere.
Our foreign-currency denominated external public debt will rise sharply and will take away more resources from the discretionary public expenditure votes. Businesses cannot plan long-term due to the uncertainty in the currency, delaying investments. Clearly, there is a confidence crisis in the money market. CBK does not seem to place its fingers on the appropriate solution.
From early this year when the rapid shilling slide started, the CBK remained indifferent and shrugged off concerns over its policies. One reason for this inaction could be its dalliance with International Monetary Fund (IMF). In its July mission, it advised ‘CBK to refrain from intervening in foreign exchange beyond what is needed to attain the required reserve accumulation’.
In short, IMF’s concern was only the current account deficit and not the devaluation. They pushed for a credit squeeze to businesses through higher lending rates. CBK raised its Monetary Policy Rate and sat back, hoping it would halt the slide. But lending rates are usually far much higher anyway; CBK ought to control banks by seeking measures that would get them to contribute to economic growth through targeted lending for needed projects.
Perhaps an obvious reason the Governor shies away is the huge fiscal deficit occasioned by the rising Government spending that is fuelling inflation. Shutting down credit to private sector and allowing Government to live large will worsen inflation. Already, the country’s double-digit inflation is headed to 20 per cent due to the energy and commodities imports.
True, many countries in the emerging markets such as India, Brazil, South Africa, South Korea and Russia face currency slides too due to the Eurozone crisis. However, even countries like Brazil that is a major exporter have intervened to stop the slide. Devaluation makes a country poorer and the State must intervene as the markets cannot always address the problem.
If the shilling slides further, the Government may as well shelve its proposed price control statute; it will have zero effect! The cost of living will rise and the desperate struggle for survival by most Kenyans continues. Perhaps it’s time for new brains at CBK! Over to you Uhuru!
The writer is a former MP for Mandera Central and political economist." Courtesy of Standard Digital.
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