In the recent past, there have been several articles in the media informing us that the Kenya shilling is over-valued.
The articles cite foreign sources namely the International Monetary Fund and World Bank.
The accusation
On 25th October 2018, the Standard Newspaper reported that the Kenya shilling is overvalued by seventeen point five per cent (17.5%). The source was IMF after a review of the Kenyan economy.
Even before the dust has settled, in under two months in January 2019, the media reminded us that the Kenya shilling was overvalued. This time the report was that the shilling was overvalued by 37.5%.
How does one explain the jump from 17.5% to 37.5% in three months? Yet we were not in any types of crises be it political, economic, religious etc. If this did happen, then shilling would be one of the most useless currencies in the world.
Kenya’s position
According to Bloomberg (28/11/2018), the Central Bank governor Dr Njoroge (a former IMF employee) dismissed the analysis by IMF of the Kenya shilling performance. The Governor raised pertinent issues reminding us of the obvious that when an analysis methodology is questionable, the results too are questionable.
The Governor detailed five reasons why the IMF results were not acceptable.
- IMF used External Balance Assessment-Lite methodology that is designed for advanced economies. Using the methodology in emerging economies such as Kenya will not give acceptable results because the parameters are different.
- The methodology used is new having only been used since 2015 a period not considered long enough to sort out any challenges that may be experienced when using the methodology. Hence, the IMF was using Kenya as a “guinea pig” to test the analysis methodology. Any results from this methodology unless supported by other methodologies will be challenged.
- The methodology has documented weaknesses which have not been addressed. This makes use of the methodology questionable.
- The analysis of the shilling’s performance was undertaken in a “black box environment” where observations on inputs and outputs were made from outside without considering what was happening in the country. This is equivalent to observing cattle getting into and out of a cattle dip. One cannot make valid conclusions without information about what is happening inside a cattle dip.
- The shilling is marginally overvalued by five per cent (5%) which is acceptable. This was established after using several common and well-tested approaches such as Elasticities, Purchasing Power Parity and Real Equilibrium Exchange Rate to analyses the shilling performance.
All these reasons are valid.
What is CBK being accused of?
An exchange rate is the price of a currency. This price is expected to be determined by market forces of supply and demand (more supply with low demand results in low prices: less supply with higher demand results in higher prices). When the shilling is over-valued, it means that the price of the certain currency that it is being compared with is low. When the shilling is undervalued, it means that the price of the currency is higher.
What IMF and co. are saying is that CBK has been interfering with the price of currencies to keep the prices low. This means that instead of the price of the US dollar being kshs 100.91 (3/4/2019), its actual price should be kshs 138.75 (at 37.5% over-valuation of the shilling).
Can this happen? Yes, it can.
Illustration:
For illustration, we will use Marikiti Wholesale Market (referred here simply as Marikiti) in Nairobi to explain how this can happen. Almost in all markets be the money market, a vehicle market, a cereals market, a greengrocers market, there are similarities in the relationship between supply, demand and price.
In case one day in Marikiti there is oversupply of cabbages, the price of cabbages will drop. However, when there are few cabbages in supply, the price will go up. A few traders can manipulate the price of the cabbages by manipulating the supply. When the prices are high and the traders want to reduce the price, they will simply increase the by bringing in more cabbages.
The opposite is true.
However, this can only happen temporarily because there are many cabbage traders and there is the availability of information.
CBK is being accused of doing the same thing; influencing the foreign currency prices by manipulating their supply. How? By probably offloading US dollars and other currencies into the money market when the supply is low to prevent the prices from going up. However, just like the case of the cabbages, CBK is not the only supplier of the US dollars and other currencies in the money market. Besides, the shilling has been stable for a long time indicating a lack of arbitrage in the money market.
It is common knowledge that US dollars inflows and other foreign currencies into Kenya are not only influenced by exports. Foreign remittances by those in the diaspora heavily influence the price of foreign currencies in Kenya.
It is important to note that the foreign remittances are direct through the official and unofficial channels and also indirect through such activities as supplies (e.g. clothing, household goods etc.) and school fees paid for family members and relatives in foreign countries which effectively reduces local demand for foreign currencies.
What will happen if the shilling is devalued?
Remember an exchange rate is a price. If the shilling is devalued, it means that a US dollar, for example, will retail at kshs 138.75 instead of the current kshs 100.91. The US dollar will be expensive. This price will have positive and negative effects. Exporters especially flower exporters, domestic tourism and diaspora remittances will be positively affected.
Import of consumption supplies and raw materials will suffer. Devaluation of the shilling will mean that the importers will require an extra 37.5% of a dollar to buy their goods. This price increase in shillings will translate into higher insurance and transport costs because they are dollar-based. This means that the imports will not only be expensive by 37.5% but by a higher figure.
Kenya is a nett importer and hence, the losses on imports will be higher than any gains on exports due to the devaluation.
Tax effects
An exchange rate is a price and most taxes are based on price. Increase or decrease in exchange rates have similar effects on tax. High exchange rate increases local prices which effectively increases the taxes payable. When imports are expensive, import taxes and duties and all other taxes in the country increase.
The higher prices based on the price of the foreign currencies will translate into higher import taxes in the form of higher import duty and taxes. The increase will not be 37.5 % but more. This increase in prices and taxes will be passed on to the consumers in the form of higher prices and higher taxes. This will be disastrous for the economy that is already struggling.
Country’ Survival
For many years, developing world economies Kenya’s included have suffered in the hands of international institutions (remember Structural Adjustment Programs [SAPs]). Perhaps it is the right time to re-read “Confessions of an Economic Hitman” by John Perkins.
This talk on the possible devaluation of the Kenya shillings is dangerous to the very existence of this country (ask the people of Zimbabwe or Venezuela).
As at September 2018, Kenya’s external debt was Kshs 2,605,334,000,000 (kshs 2.605 trillion). The foreign debts are US dollar-dominated. But resources to pay the external debts are in Kenya shillings from domestic borrowings and tax revenue.
The external loans have increased since September 2018.
Devaluation of the shilling means that the country would have to pay an extra Kshs 977,000,250,000 (37.5% x 2,605,334,000,000) which translates to total foreign indebtedness of kshs 3,582,334,250,000. Our external debt would increase by almost a trillion. Assuming a population of 40 million, each one of us would owe Kshs 89,558.36.
Many Kenyans have never and will never own this amount of money in their lives.
Currently, Kenya is struggling to pay its foreign debts and the situation may get worse (many projects have stalled). How would we as a country sort this problem of foreign debts? We have several options:
- Seek to be forgiven the debt… this is a tall order.
- Reschedule payment dates thus delay the payments, this will attract higher penalties making the situation worse.
- Refuse to pay the debts at the expense of being ostracized by the World community.
- Since Kenya is heavily indebted to China, we can seek help from the West. This will take us back home from where we came from – the prodigal children of the West.
The vulture strategy
During the partitioning of Africa in 1884/5 (Berlin Conference), the only two things that we as Africans had done “wrong” were:
(1) being civilized in our way and
(2) having natural resources.
Therefore, according to the West, we needed to be civilized and our resources are taken away. However, with time, the West realized that it is impossible to civilize an already civilized African and they gave up. The African was already civilized in his/her way).
After many wars and battles for independence, the West decided to concede to minimum political independence with terms and conditions among them zero economic independence.
The West needed our resources.
Over time, our countries became of age and we started looking towards the East. There, we got a suitor in the name of China. China was generous and we behaved like the drunk. For a time, our appetite for the Chinese money was insatiable.
We forgot that there is nothing for free.
This forgetfulness made it very easy for China to colonise Africa without firing a single shot. Probably the easiest way to Africa is to come dangling foreign currency. An African goes crazy at the sight of foreign currency. Remember how we are mistreated when we visit tourist frequented restaurants.
Yes, Africa is a Chinese colony.
Truth be told, this colonization even goes with enslavement. How?
For every single decision that our governments in Africa make, they must factor in Chinese loans. Governments do not have their own money. It is taxpayers who contribute taxes to pay the loans. Every single day in Africa, certain percentages of people’s daily earnings will go towards repaying the Chinese loans.
If this is not enslavement, tell me what it is. You don’t have to take the African to the sugar plantations in the Caribbean to enslave him/her. Nope!
But how will the West dislodge China from Africa, Kenya included now that colonization will come with the added advantage of enslavement? Simple. Make it difficult for the African to repay Chinese debts.
How will the West make it impossible for us to pay the debts?
Use several vulture strategies including the devaluation of the local currencies. Then China will come calling. Hardpressed to pay Chinese loans and the collapsing economies, African countries, Kenya included will have no alternative but to go to the West with a begging bowl, this time begging for money to pay debts that they voluntarily took.
Conclusion
The subtle sustained attack on the shilling aims to ultimately force the government to devalue the Kenya shilling and take us back home. This vulture strategy leaves us with one question: Are the “economic hitmen” in town? Probably, it is time to colonise Africa for the third time. This time around, put enslavement into the mix.
What do we do? I leave it to you to figure it out.
Then again…perhaps the adage is true: when a lie is consistently told, its metamorphosis into truth. However, I am reminded of the wise words of Booker T. Washington that “A lie doesn’t become truth, a wrong doesn’t become right and evil doesn’t become good, just because it is accepted by the majority.”
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Disclaimer
This post is for general overview and guidance and does not in any way amount to professional advice. Hence, www.taxkenya.com, its owner or associates do not take any responsibility for results of any action taken on the basis of the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from KRA. Tax industry in Kenya is very dynamic.
