KWAME: The good and the bad of Kenya’s new currency printing policy - Daily Nation

The good and the bad of Kenya’s new currency printing policy

Friday December 7 2018

By KWAME OWINO
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In my count, there are only two material sections of the Constitution of Kenya that all arms of government and public institutions whose implementation has been ignored. And both have gained currency in the last month for different reasons.

These two are article 81(b) and article 231(4) and these relate to the gender composition of Parliament on the one hand and the re-designing, printing and distribution of new currency on the other. The former seems closer to resolution due to a new Constitution amendment bill that Parliament will vote on within the early months of 2019.

The printing of new currency is more certain now after the courts determined that in spite of inadequate transparency, the Central Bank of Kenya (CBK) did not violate regulations in the award of the printing contract to the same firm that has had a hold on the printing of Kenya’s currency for two straight decades. This decision resolved the matter in favour of the CBK that expressed relief that it will go ahead to print and issue the new currency even though the constitutional deadline passed three years ago.

GOOD RELATIONSHIP

Besides the constitutional demand for a new currency design, many Kenyans have resigned to this imperfect process based on three claims. The first and most superficial is that maintaining the same currency printer is a sensible industrial policy choice because the incumbent printer already has a good relationship with the CBK.

It is essential to point out that basic principles of competition policy would demonstrate that this is an unsound economic reason for keeping the same currency printer, mainly because it undermines competition in currency printing and more so ties Kenya to a single supplier for the long term. Additionally, the negotiating power of the printing firm has been completely enhanced and the costs of extrication from this partnership will be very high in the future.

GOVERNMENT ASSURANCE

The issuance of a new currency is also justified by the claim that the printing firm that has partnered with the CBK had received assurances from the government and made new investments in Kenya on that basis. Based on this assurance of commercial patronage from the public sector, any decision that denied it the chance to make new currency would be an adverse signal that would precipitate its exit.

In my view, this assurance may have been given, but it directly violates Kenyan competition laws, tying the public sector to one entity for a long time. On this basis alone, an agreement of this kind ought not to stand. It is bad policy and fortifies monopoly status for a firm in a way that takes away the benefits of competition from taxpayers.

CRIME CONTROL

Another preposterous idea being advanced as a possible economic advantage from the expected issuance of new currency is related to crime control. The simple theory states that many people in Kenya are either tax cheats or beneficiaries of proceeds of crime, and that, arguing from the same playbook used in India two years ago, this ''demonetisation theory'', abolition of one currency in favour of a new one would render most cash held by criminals unusable in commercial transactions. This would mean that those criminals in both the public and private sector would be unable to recycle their sacks of cash back into the payments system.

This tendency to throw any and all ideas into the ring is understandable, given the frenetic pace at which the theft of public resources is revealed with every sunrise and sunset. It is a reflection of the desperation of Kenyans to see government adopt effective means for reducing blatant criminality, but that doesn’t mean that it is feasible.

The government of India sold demonetisation policy as a crime control issue and messed up its monetary policy so badly that many economists who know what was attempted gave the entire effort a failing grade because the real costs were borne by the most vulnerable in society, while most of the criminals who were targeted hardly lost any wealth.

To its credit, the CBK has not made this preposterous argument, and it may be because there is expanded understanding that the demonetisation in India had adverse consequences and even shaved of nearly one percentage point from annual growth.

For Kenya’s case, this policy change must be seen as strictly about implementation of the Constitution and not that it’s a magic wand to reduce crime because it is not. Regrettably, this implementation locks the country into formal commercial relationships with a virtual monopoly.

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