A stable shilling helpful to our economy than weakened dollar

The shilling has gained against the dollar. [File, Standard]

For people who had kept their money in foreign currency, under mattresses or in dollar designated accounts, this week has been the local equivalent of the infamous Black Monday.

On Monday, October 18, 1987, the global stock market crashed, suddenly, and without warning. It is estimated that the loss to the global economy was roughly 2 trillion US dollars, leading to fears of a return to the depression.

Our severity may be less, but the suddenness and unexpectedness of the Kenya shilling rally against the dollar is comparable to Black Monday for the dollar holders.

In the last one year, the Kenyan shilling has been steadily losing value against major currencies trading from Sh120 to the dollar in January of 2023 to the painful value of Sh164 to the dollar in January 2024, a short year later.

For people who had to import necessaries or pay for inescapable services, this has been a tough year. Parents with students in the UK saw the British Pound climb from Sh135 to Sh200 raising student fees by almost 50 per cent within one year.

In the last few months, landlords and similar service providers had started quoting prices in dollars and many preferred to be paid in the Greenback.

It is therefore not surprising that many Kenyans resorted to holding their savings in foreign currency and many analysts pushed people towards holding dollars to hedge against the losses they were incurring from a weak currency. Then Monday happened.

From an initial Sh160, the dollar collapsed with a deafening sound, dropping by up to Sh30 at some point. Kenyans who had gone for Valentine's dinner at Sh150 to their dollar woke up to rates as low as Sh135.

Kenyans rushed to Forex bureaus to trade off their hitherto valued bucks for shillings. Phonelines to banks' treasury departments were overwhelmed by orders to sell. How did we get there so suddenly?

Some people believe the strengthening of the shilling was informed by oversubscription of the current Infrastructure bond by foreigners, or the enthusiastic subscription of the Eurobond in the international bond market.

Others believe the Central Bank dumped dollars in the market, partly on the promise of the Eurobond. Whatever the initial reasons, the panic selling of dollars, following the natural laws of demand and supply, also added to the shilling's further appreciation.

The reality is for the next short while, the dollar could be quite volatile, unless the Central Bank makes some interventions. That said, my little economics tells me what Kenya needs, more than a strong shilling, is a stable shilling that enables them to plan predictably.

Secondly, my basic economics tells me that Kenya, a developing country still depending on imports of fuel and most manufactured products but seeking to grow its import capacity, requires a realistic shilling value.

An overly strong shilling destroys our export sectors and encourages unnecessary consumption of imported goods thus killing our infant manufacturing sector.

On its part, an overly weak shilling, while making our export earnings attractive, makes our imports, including necessaries like fuel and gas, and our debt payments, unduly expensive.

It thus behooves our economic mandarins, led by the cerebral Dr Kamau Thugge to create an environment, and make policy interventions, that enable our currency to reflect our true economic realities.

More importantly, the currency needs to be stable; volatility can cause more damage than the strength or weakness of a currency. Are there lessons from this week?

The most basic teaching on risk is that all actions that promise great profits also pose the greatest risk. For a while, holding dollars offered great rewards, but it came with enormous risks.

At a national level, the lesson is that for as long as our currency is dependent on non-productive activity, and not supply-side factors, it remains vulnerable to dynamics we can't control. It will keep hurting our economy.

As we watch the goings on in the forex market, let us pray that the shilling will find its level quickly and that we can go back to dealing solely in our currency. May the days of the Kenyan shilling being treated as a near junk currency be behind us. We can only hope.

-The writer is an advocate of the High Court