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Tuesday, June 14, 2011

The Shilling Debasement

The Kenyan Shilling has been on downward decline of late, trading at almost 90 Shs to the Dollar.

Should we consider this as a problem?

Let me try to construct a logical argument that will put a sock in the mouths of economic doomsayers. The shilling's depreciation helps exports. An export boom is how economies grow and wages rise.

Additionally, high exchange rates discourage importation which will in these deficit times  balance the country's current account deficits.

This also is a boom time for the hundreds of thousands of Somalis who receive support  from relatives in the diaspora since their disposable incomes will experience a significant rise.
Moreover, the Somali investor class from the diaspora get more bang for the buck if the shilling continues its downward nose-dive.

The downside to the shilling's downward trend?

One serious repercussion is oil prices will go up since they are begged to the dollar. Pricier gas might impede economic growth and push up commodity prices (moderately)-even though there has been an upward tick for a while. On a positive note though, more people will be taking public transportation thus reducing traffic and pollution on Nairobi's streets. A corny point to make but none the less a cogent one.

The central bank is better off not intervening in the monetary market. However, focus should be on bringing down inflation, before commodity price rises broaden through out the economy, by raising base interest rates, asking banks to reduce lending and generally reigning in on consumer price hikes.

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