Someone needs to halt fall of the shilling and save weak economy

When the shilling closed at a high of Sh97 to the dollar last Friday, it had depreciated by 5.4 per cent, the lowest digit in nearly five months.

Many in the money market were filled with aghast because it seemed as if nobody, at least at the Central Bank of Kenya, cared much about the dwindling fortunes of the shilling. It would be foolhardy to imagine that the rise of the dollar was limited to the Kenyan currency alone. Across the globe, the dollar appreciated 11 per cent against major currencies like the Euro and Yen in the last three months to April.

An inter-play of market fundamentals cause the value of the shilling to rise or fall. But in the case of the shilling, the fall could marginally be attributed to the delayed transition at CBK. There has been no substantive head at the Central Bank since the retirement of Njuguna Ndung'u about two months ago. A CBK governor wields great influence, but not so much as to reverse the fall of the shilling.

Most importantly, Kenya is a floating exchange regime. That means, the value of the shilling is determined by supply and demand forces. But what has caused the shilling's value to fall? Worrisome investors watch as the shilling ominously hurtles towards the levels witnessed in 2011 where the shilling touched Sh107.

Nobody expects that the shilling will fall to levels as seen in the Asian crisis in 1997 triggered by the devaluation of the Thai baht, but it remains critically vulnerable. But saving the shilling is a matter of life and death. It means that there were no lessons learnt after the shilling's precipitous fall in 2011.

Kenya being a net importer, an expensive dollar will lead to a rise in the cost of living which is ruinous to the economy. An expensive dollar means such projects like the $4 billion Standard Gauge Railway and the $3 million Lamu Port and other major infrastructural projects will cost more in the end. A case in point is the price of fuel which despite a significant drop in the world market, the price at the pump remained high. That translated to little to nil gains to consumers because production costs remained high. What needs to be done to cushion the shilling now and in the future?

First, Kenya's unhealthy trade deficit is exacerbated by an expensive dollar. As of January 2015, the deficit stood at $1.8 billion a month, against exports of $450 million. In the long term, transforming ours into an export-intensive economy could help stabilise the shilling and cushion it from external pressure.

Secondly, plans to revitalise sections that provide outflows like tea, coffee and horticulture (that have stagnated) need to be followed through to realise a healthy balance of payments. That, and a revamped tourism sector could bring the much-needed dollars to shore up the economy and help offset the import bill from machinery and industrial supplies that stood at $400 million as at September 2014.

The discovery of oil could also help assuage the pressure on the shilling when oil exportation starts. Though that could be in the distant future. With a ballooning middle class thirsting for cars, imported accessories, fashionable electronics and at times holidays abroad, the trade imbalance is set to grow consequently weakening the shilling further. That should not be allowed. There is, however, cold comfort that an expensive dollar is good for exporters. Yet on balance, this gain is lost because of the imported inputs like machinery, seedlings and fertilisers.

Someone needs to move, fast, to halt the fall of the Shilling and save the economy from unnecessary shocks.