Save the shilling by flooding market with dollars so speculators can lose

The shilling is badly undervalued. I do not want to shout fire in a crowded theatre.

But what worries me is that every other player in the market I speak with appears to be in a self-fulfilling prophecy mode, predicting more trouble for the currency.

For most dealers it is still a one-way bet. And they have made tonnes of money since the shilling started feeling the pressure several months ago.

I am not against speculators. This is what capitalism is all about. But if we allow the currency to fall further, the pressures on the macro economy will soon be overwhelming. (READ: Tighten your belt, life is likely to get rougher in coming months)

You will excuse me if I sound simplistic. If the International Monetary Fund is serious about helping us out, this is the time to give us the dollars.

Speculators engaged in amassing dollars must be made to feel some serious pain. That is the language they understand.

Granted, it is not politically correct to talk about intervention by the Central Bank of Kenya. You will be dismissed as a heretic.

Yet after speaking with several market players and having read the mood in the market, I am convinced that until someone inflicts serious pain on these merchants, the negative sentiment in the market will persist to the detriment of the stability of the exchange rate.

Financial markets here do not go by fundamentals. Like punters, they rely on guts and what their peers tell them on the golf course.

And since positions are not taken on the basis of robust and serious analysis of happenings and trends in the macro economy, the money markets here are prone to panicky behaviour.

In other jurisdictions, large commercial banks maintain large economic departments staffed with economists trained in both theory and practice. Our commercial banks do not hire economists.

When Ms Razia Khan — the head of economics at Stanchart — comes to town to give public lectures, CEOs of our commercial banks troop to her presentations to scramble for front row seats. Ms Khan does not live in Nairobi.

I digress. The point is that the current negative sentiment on the shilling will not change until some of these punters are made to suffer losses.

Of course, the major players will have different thresholds for pain. A major intervention will cause them to change tack since they are currently taking positions under the assumption that there will not be enough dollars in this market in the medium term.

Allow me to stress my point by an anecdote. When former Finance minister David Mwiraria left the Treasury in 2005, rumours spread in Meru town that a local commercial bank associated with him was about to collapse.

Panicky depositors headed in droves to the local branch of that bank to withdraw their savings.

Faced with the prospect of a run, the top management of the bank in Nairobi immediately transported tonnes of cash to Meru to pay the depositors.

Each depositor received his cash on demand and the bank did not shut its doors. Two days later, the panicky fellows realised that the bank was not about to close its doors and had plenty of cash.

The banking hall was jammed with people who wanted to return their cash. I cannot vouch for the veracity of this anecdote, but the lesson here is the following: confidence may be an intangible thing.

But in markets that are driven by sentiment, it matters much more than assurances by Central Bank.

The Central Bank of Kenya and the Treasury must realise that if the shilling persists in the present trajectory, the situation may cause a huge political problem for the government.

This thing could brew political agitation for the return to exchange controls. That IMF programme they are slavishly applying will not help when the political class starts a loud campaign for the restoration of “the sovereignty of the shilling”.

We have a very inefficient financial market. Only a few big banks lend money to one another in the inter-bank market.

It is a segmented market where one group has liquidity while others do not. This is why the so-called Horizontal Repo market is not functioning properly.

Loopholes allow you to borrow money from the Central Bank from one window and lend it at a profit to the government through another window.

Under the circumstances, merely tinkering with monetary policy is not enough. Let the Central Bank put some serious dollars in the market.