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There’s need to get to the root of our problems and how to stabilise shilling

Tuesday October 4 2011


By JAINDI KISERO ([email protected])

The statement last Thursday by President Kibaki about the government taking steps to stabilise the shilling was very timely.

The move by Prime Minister Odinga to establish a task force to recommend measures to stabilise the currency was brilliant.

On Tuesday, the task force met delegations of both the Kenya Banker’s Association and the Kenya Private Sector Association.

The task force has representation from a wide array of institutions including Treasury, the Central Bank, the Office of the President, the Kenya National Bureau of Statistics and the secretariat of Vision 2030.

The parliamentary Committee on Finance and Trade has also woken up from deep slumber. They will shortly be summoning the Central Bank Governor to give them a road-map for stabilising the shilling.

I am not too comfortable with the manner in which the task force is approaching its mandate. Meeting lobby groups and private sector associations is not bad.

But the priority right now is negotiation with the actual players in the market. It is easier to commit CEOs of a few big players to a common approach to solving the currency crisis. You can even cut mutually beneficial deals with them.

I read somewhere that confronted with a housing bubble in 2008, the South Africans summoned what they call the ‘‘primary dealers’’ there and engaged them in board-room negotiations which ended up averting a banking crisis.

The Monetary Policy Committee meets on Wednesday, and pundits are suggesting that the committee should this time raise interest rates by a big margin to reduce pressure on the exchange rate.

Yet the truth is that raising interest rates is not an easy choice. If we increase the rates by a big margin now, how shall we roll over the huge domestic debt we have amassed in our books in the next two years?

Do we really want to go back to the Moi years of high interest rates, sluggish growth and a persistent domestic debt overhang? I don’t know.

I am a supporter of the theory of an independent Central Bank. But bringing in key government institutions into negotiations to get us out of the currency crisis was a very good idea.

Key institutions in government who, ordinarily, would have had no interest in the conduct of monetary policy have an opportunity to assess whether our institutions function properly.

Why has it taken so long for the Central Bank to appoint a deputy governor? How accurate is the Bank’s research department when it comes to predicting the likely movement of key prices in the economy?

The Monetary Policy Committee conducts its affairs as if it was an exclusive priesthood. We do not know the views of individual members of this body.

In other countries, positions and views of members of this committee are well-known publicly. You can tell who among them is an inflation hawk and who is not.

The shilling crisis is not just about reining-in greedy bankers. When you blame bankers alone, you overlook the systemic forces at work.

Let the task force investigate the inner workings of our financial markets. We have very inefficient financial markets.

Within the interbank market, a few big banks lend money to one another and liquidity is not evenly spread among players.

This problem was to manifest itself with a bang during the Safaricom IPO, when we found ourselves in a situation where nearly all liquidity was sitting in a few big banks. Several small banks nearly collapsed as they had not credit lines with the big banks.

In many instances, you will find several banks rushing to borrow from the Central Bank Rate Window even where there is adequate liquidity in the market.

These in-built inefficiencies are the reason why banks are minting millions – by borrowing from one window at the Central Bank and lending the money to the government in the Treasury Bill auctions.

The inefficiencies are why monetary policy does not transmit effectively in Kenya. Still, we must get to the root of the crisis. An economy where everything is imported is doomed to disaster.

We need to start a conversation about high tariffs on consumer goods. Can high tariffs on consumables work in an economy where the retail and wholesale sectors contribute to a large proportion of national income? I have no idea.