The shilling has gone haywire. I am not worried about the level of the shilling per se but its volatility.
If you took your child for further studies abroad, you don’t know how much you will eventually pay because the price of the shilling keeps changing.
The Central Bank governor, whose responsibility it is to stabilise prices in the economy is currently in Washington. He does not have a deputy. In fact, we have not had a deputy governor for more than a year.
The Treasury permanent secretary is also in Washington. The minister for Finance is at The Hague. These are desperate times. We need drastic action to stabilise the currency.
What should be done? Clearly, this situation is now way beyond the Central Bank of Kenya. There is a limit to what you can achieve by tinkering with the tools of monetary policy especially in the context of a segmented financial market where policy does not transmit.
Textbook theory teaches that when your currency is under pressure, you increase interest rates. The Monetary Policy Committee has tinkered with the Central Bank Rate several times this year. It has not helped.
In any event, considering the massive losses the shilling has suffered this year, the kind of changes you need on interest rates to absorb the pressure on the shilling will be politically impossible to implement.
As we went to press, they put out a statement in which they propose that they will be selling dollars directly to customers in targeted sectors of the economy.
Are we back to a two-window system? Well-connected people will be buying cheap from the CBK window and flipping it in the open market. It is the perfect setting for another Goldenberg scandal.
The Treasury, the Office of the President, Office of the Prime Minister, and Ministry of Planning must now step in. They should insist on holding an urgent meeting with large commercial banks and major players in the financial markets.
In that meeting, they should agree on a coordinated approach towards putting enough dollars into the market to stabilise the shilling.
This should not be a meeting to lecture the commercial banks or to warn speculators, but to persuade the big players to appreciate that if the macro-economic situation collapses, they will incur major losses in their loan books.
Let the government present to the banks what it wants to do to address debt levels and how it wants to deal with the deteriorating balance of payments situation.
The worrying thing is that the Central Bank is not in sync with the financial markets in terms of direction, which is why, whenever the Bank issues a statement, the shilling suffers increased pressure.
When you track the past statements made by the Central Bank from the time we started having problems with the shilling, the trend you see is that in the majority of cases, the situation has been getting worse.
I don’t the see the fundamentals that have changed so drastically as to drive the shilling to 102 units to the dollar.
They say it is something to do with the turmoil within the euro-zone. Yet this is the same economy that survived the global financial crisis of 2008 when we all gloated how our economy had in-built resistance to turbulence in the international financial markets.
They say is it is dollar demand from oil imports. Yet international oil prices have been going downwards for some time. The reason why the oil import bill has increased is the devaluation of the currency.
They cite food imports as a factor. Have we imported more than before? How about the exports side? Where is the evidence that coffee, tea, tourism, horticulture and diaspora receipts have dwindled as low as to drive the shilling to 102 to the dollar?
What we are seeing now is mainly the uncertainty and panic. Exporters are right now keeping their earnings in dollar accounts.
The market is in a self-fulfilling prophecy mode. In the language of forex dealers, “you don’t try catching a falling knife”. Dealers are literally running away from the shilling.
We can’t just sit back and wait for the worst. The government must do something. The finance committee should summon the Central Bank and insist on a road-map for stabilising the currency.