A weak shilling might not be such a bad thing; we need it for economic growth

Lately, there has been much attention on the Kenya shilling, especially after its near-collapse last year. My question is: should we have worried so much about the weakening of the shilling? Is a weak shilling such a bad thing for the Kenyan economy?

I do not want to justify or condemn the way the shilling crisis has been handled. My problem is with the widely accepted notion among financial experts that a weak shilling is bad for the economy and a strong one good.

A currency’s value is determined by the amount of its units that can be exchanged for one unit of another currency.

When you have to give more of your currency than before to get one unit of the other currency, it means your currency has weakened against the other one.

The opposite means your currency has become stronger.

In August, the Kenya shilling was exchanging at Sh84 to the dollar. Come December, it was at Sh107.

This means it weakened against the dollar. It is important to be specific in terms of the currencies involved because it is possible that the exchange rate against other currencies might not have changed at the same rate.

If the shilling behaves in this way against only one type of currency, say the dollar, then it is important to find out if it is the dollar that has strengthened, and not the shilling weakening.

So, is a weak shilling good or bad for the country? The general consensus is that we like a strong shilling so that we can afford the imports we love to buy.

But is this good for the economy? Will it create jobs and generate income for us? The currencies of countries like China, Japan, and India are relatively weak.

In fact, the US has accused China of adopting policies that deliberately keep its currency’s value low.

The Chinese earn huge amounts of foreign currency from their exports, which in normal circumstances should drive the value of their currency up.

But they have made sure that it remains weak by sending out the foreign currency earned for investment in other countries.

It has been argued that China’s $2 trillion investment in the US is one of the causes of the recent global economic crisis.

Japan was able to capture the world markets for cars and electronics by keeping the value of the yen low. Italy, for many years before the advent of the euro, kept the lira’s value low.

In India, the economy has grown steadily over the years as the rupee depreciated.

To maintain a strong shilling requires a lot of foreign currency inflows. As long as these inflows are not generated by the economy, it is going to be difficult to sustain a strong currency without interfering with the markets.

We know what happened with the Zimbabwe dollar. When the central bank tried to insist on a rate that the market could not sustain, the result was a black market and the eventual collapse of the currency.