Appeal to strengthen the ‘weak shilling’ is purely political

What you need to know:

  • Which principles of economics would allow for a stronger currency and a reduction in imports at the same time?
  • Given that Kenya abolished foreign exchange controls two decades ago, the idea that the currency is “too weak” is itself mistaken.
  • The freedom to use currencies to save wealth as one pleases is one that many individuals and firms treasure, and it shouldn’t be interfered with just to please currency nationalists.

Ask any Kenyan pundit and you would get a number of reasons for the recent decline in the value of the Kenya shilling relative to the US dollar.

Away from corruption, the performance of the Kenya shilling has become the subject of the moment, elevated as the first question on which the competence of the new Central Bank governor is being judged.

The governor is being urged to “do something to prevent the further slide of the shilling against the dollar”.

Despite lending a careful ear to the pundits, I am not convinced that shoring up the Kenya shilling is the most important issue facing the Central Bank's incoming governor.

Most of the reasons cited to support strengthening the shilling are self-interested appeals, obtusely worded as being in the public interest.

The posh and serious assert that the nation’s currency must be defended, but I have learned, since the early days of this century, that policy discourse that adopts metaphors of violence and war is pure emotion, and does not elevate the debate.

'DEFEND THE SHILLING'

This appeal to strengthen the shilling reflects the fears of a number of traders or holders of currency, who may have taken positions that will unravel because of the weakening shilling. They should roll with the punches and stop crying wolf.

A most interesting assertion by these currency nationalists is that the shilling is losing value relative to the US dollar because Kenyan firms and households have developed a high appetite for imported goods and services.

They proceed to argue that it is incumbent on the Central Bank of Kenya to defend the shilling now, and only thereafter ask the government to initiate measures for self-sufficiency and expand exports.

This crowd does not realise that what they call defending the value of the Kenya shilling will ensure that imports remain more affordable.

Their preferred solution does not help to resolve the problem that they say concerns them, which leads one to speak directly to these currency nationalists(they tend to be men). Which principles of economics would allow for a stronger currency and a reduction in imports at the same time? Wake up boys, you are being too serious for your own and the nation’s good!

WHY RESERVES MATTER

Together with these contradictions is a fallacy about the reason behind the currency reserves that the government maintains at the Central Bank.

It is true that every prudent country builds a balance of foreign currency. However, this fetish for foreign exchange is a common fallacy among people who love the smell of dollars because they think the reserves are an end unto themselves.

National currency reserves must serve a greater purpose than being the subject of boasts about billions of dollars in the vaults. Kenyans must not forget that the primary purpose for which a country exports goods and services is to acquire the foreign exchange necessary to import what it requires.

It’s not a question of piling up foreign money for the sake of national pride. Keeping reserves has costs too.

Given that Kenya abolished foreign exchange controls two decades ago, the idea that the currency is “too weak” is itself mistaken. The diversity of currencies available for private holding is a signal that citizens are free to choose the currency in which to save their wealth, and traders similarly can choose to accept payments in different currencies.

CURRENCY NATIONALISTS

This freedom is one that many individuals and firms treasure and it shouldn’t be interfered with just to please currency nationalists. Without ascribing motives to the "currency nationalists", their arguments that the Central Bank should pump dollars into the market to stabilise the shilling is purely a political argument masquerading as dispassionate economic reasoning.

Consider that while the foreign exchange fetishists seem to prefer exports to imports, there are Kenyan industries and firms that export services and goods such as the tourism industry and horticulture growers.

A weaker shilling relative to foreign currencies means that such firms have opportunity to increase income. Thus any action by the Central Bank to "defend the shilling" and make it stronger means that the government is patently redistributing income from exporters to importers. That is politics disguised as economics.

A huge trade deficit like what Kenya has today is not desirable, but imports by firms and households have real value.

If people are willing to spend their shillings to purchase dollars and consume foreign goods, it is not for the “currency nationalists” to scold them as if firms and households that earn their money do not understand value.

Kwame Owino is the Chief Executive Officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi. Twitter: @IEAKwame