Change tack lest things get worse

Central Bank of Kenya

The Central Bank of Kenya building in Nairobi.

Photo credit: File | Nation Media Group

Last week, I sent text messages to a very wide range of expert sources and authorities in economics and business to sample their views on the burning economic issues of the day.

Respondents included National Treasury officials, past and present members of the Central Bank of Kenya’s Monetary Policy Committee, CEOs of large commercial banks, top managers and directors of treasury departments of the major banks, chairmen and directors of big commercial banks, and top economists dealing with Kenyan issues at both the International Monetary Fund and the World Bank.

I framed my question thus: Why is the oil-for-credit deal which we contracted with petroleum suppliers from the Gulf not stemming the depreciation of the shilling as was touted by the government when the deal was launched about five months ago?

In recent months, monetary authorities have been influencing interest rates upwards in the hope that this would attract capital from abroad and, therefore, stem the free fall of the shilling. Why are we not seeing any significant impact on the value of the currency? Why have large exchange spreads persisted and why isn’t the interbank market for forex not as active as it used to be?

Below is a summary of selected quotes from the responses I received. “There is pent-up demand for the greenback, which remains in short supply despite the fact that oil is being paid for in dollars.” “You can’t exit from a shilling investment now when the dollar shortage situation is still persisting.” “Banks are taking outrageous margins from forex trading.”

Local dollar markets

And more: “Interest rates would have to go up significantly to allow investors to get the returns to compensate the expected depreciation of the shilling.” “We have [many] clients queued up on forex while flows are still very low compared to outflows.”

Then came a prediction: “The situation could get worse when we have to raise billions of dollars to pay for the oil.”

Views from the second category of respondents, more nuanced: “The shilling will only stabilise after the government has met its pending Eurobond obligations next year.” “That large pending Eurobond payment is one of the biggest sources of uncertainty in the local dollar markets.”

 “A good indicator of stability in the market is when the Treasury bill auctions start to clear. At the moment, the Treasury bill market is still struggling.”

And now, the optimists: “There is a silver lining because the US Fed has signalled that inflation is no longer a threat to the US.” “All eyes will be on the Fed for the next six months.”

Tinkering with the edges

The last word: “Markets are waiting to see whether President William Ruto’s administration will deliver a credible fiscal consolidation plan.”

The truth of the matter is that we are at a spot where there is little that conventional monetary and fiscal policy tools can do to inject new dynamism into the economy. All they can do right now is to keep tinkering with the edges rather than tackle some the biggest causes of our current predicament—low corporate profitability, low investment in the exporting sectors, and stagnation in the manufacturing and agricultural sectors.

When you are going through the IMF’s shock therapy, you find yourself plagued by multiple interlocking crises. Every measure you take comes with severe pain christened  ‘adjustment costs’ but, in reality, is a painful set of measures that will not only squeeze living standards but also smother economic dynamism.

Under the IMF programme, we are told that we must allow interest rates to climb up substantially, ostensibly so that we can attract external capital flows. Yet when rates to go up, our commercial banks literally stop lending money to the productive sectors and instead choose to invest in government paper. Yet private sector credit is the lifeblood of business.

The IMF has told us to allow the shilling to depreciate and find its own level. The Central Bank must guard against depletion of our reserve assets and build reserve buffers. Indeed, the IMF’s tutelage is the reason we have left our currency on a free fall. Yet we all know what currency depreciation does to the cost of servicing external debt. Indeed, ours is an economy that is simultaneously dependent on debt and handicapped by it.

Our policymakers are groping in the dark, bungling from one unworkable policy to another. Flows from coffee and tea have not recovered due to meddling by politicians. We are pushing a Finance Act that is bound to administer euthanasia in some areas of the manufacturing sector, especially cement.

The IMF conditions require us to influence consumers to switch to domestically produced goods. However, we are doing the opposite: Having approved duty-free imports of thousands of tonnes of cooking oil, sugar, beans and fertiliser. We even plan to import tractors from Belarus.