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Exchange rate time spans and economic efficiency, 1967 to 2012

17th February 2013

Plenty of agitation is often heard from policy making circles that businesses in the country should stop charging for services in the US dollar, seeking to make it that this leads to the local currency losing in value to Uncle Sam's money, as this habit diminishes demand for it.

This agitation would virtually make it out that the reason for the sharp decline of the shilling over the years, for instance to the Kenya currency and not just the dollar, is due to heightened use of foreign currencies, as this diminishes demand for the local currency. This is an inverted view of reality.

The demand for the US currency that is being contested is at best limited to hotel services and often rental quotations, even if the latter would still be paid in the local currency.

Radical critics who prefer to believe that their private sentiments and often snobbish gesticulation on things that are foreign -- everything except the dark business suits and land cruisers -- have the same value as economic thinking proper, don't really spend time thinking why our shilling slides fast with regard both to the dollar and the Kenyan shilling. It is enough they issue a call, 'educate.'

Were they to spend time thinking about the question, they would discover that the use of US dollars in air travel ticket quotations, paying hotel bills or for that matter renting furnished apartments in Masaki or Mbezi Beach isn't a factor in setting the rate of the local currency vis a vis the dollar.

They would realize that what is in that sense involved is aggregate demand for the dollar especially in payments tied to dollar denominated public debt, and what is earned in exports, or foreign aid. Locally, many people keep their savings in dollars to stem short term depreciation.

At a moment where bank savings or deposit interest rates are less than ten per cent prime rates or five per cent ordinary rates, keeping savings in dollars could earn one such gains at the end say of one year, as the dollar could sell at ten per cent higher if not more. There is also ease of transaction as forex shops don't have the same queues as bank teller windows, making it easy to obtain the local currency when one needs it in substantial quantities, among businessmen in particular. Otherwise there is nothing to write home about in relation to charging in dollars.

What is more interesting is to explain why it took 30 years from the time of the Arusha Declaration to 1997, where - at the time of the privatisation of the National Bank of Commerce to complete financial sector restructuring- for the shilling to slide to Tsh10 to Ksh1, compared to the later period.

From 1997 to 2012 is another 15 years, half of the earlier period, and our shilling has travelled the same road, from Tsh10 to the Ksh1, to Tsh20 to Ksh1, which from an arithmetical point of view is comparable. It is double the previous rate in terms of linear progression.

What thus comes up as a reasoned hypothesis is that the motion of exchange rate depreciation has taken half the previous period of linear progression where it had shifted from Tsh1 to Ksh1 early in 1967, to Tsh10 to Ksh1, reached after 30 years.

But the same linear progression from Tsh10 to Ksh1 to Tsh20 to Ksh1 has been reached in 15 years from the time that it reached Tsh10 to Ksh1, one to ten in 30 years, which means it has depreciated at twice the old rate. The question is why the depreciation was faster whereas both countries were formally market economies.

Faster depreciation means the sort of weaknesses in terms of ability to attract foreign exchange into the economy, and more significantly, earn it or retain it by exports and lower exports of capital as compared to investment, worsened in the later period.

Two sorts of reasoning, or rather mapping out causes, can be put across for the faster rate of depreciation, which depend upon the viewpoint that one adopts about either economy. Is it Kenya that improved its economy, thus its currency became stronger continuously, or what sort of opportunities do we miss?

Looking at the Kenyan economy from outside, or say from 'within East Africa,' it is hard to say that it has come a long way in terms of economic reform, as in any case the agenda has scarcely been audible in the Kenyan context. If any reform agenda cropped up in Kenya, it took the form of good governance as we often try to see the problem of improving economic management. especially at the political level, which is a reflection of local conservatism in favour of public companies. In Kenya the market context has remained firm, and perhaps cut out a few abuses, etc.

Take an example of tourism, where Kenya's shortchanging of Tanzania is a glaring difference in how the two countries manage their economies. It may to an extent explain not just tourism sector performance but economic efficiency as a whole. In Kenya foreign tour operators or hotel owners have the same operational conditions as locals, in other words what is administered by law is a company, not the owner.

It is easy to see that in such a situation where Tanzania has shifted from about 500,000 tourist visits per annum in the 1990s (for ease of comparison) to nearly 1m at present, the same should have happened in Kenya at a faster rate as its regulatory regime is far more hospitable than here.

So the logic of doubling of exchange rates, similar to doubling tourism visitations, does not demonstrate total inefficiency of economy (as that would be a contradiction) but comparative levels of use of opportunities. We use opportunities, but Kenya would use vastly more.

There is another dimension of linear progression comparisons which can help to amplify on the total opportunities available in an economy, on the basis of the fact that use of opportunities implies availability of credit.

This is vital both in terms of start up ability or improvement, expansion and operations of the sort, like mergers and acquisitions of foreign companies investing in a sector. Where there is ease of availability of credit, there is a compound effect that is built over time compared to situations where lending is difficult at all levels, or may tend to be overly selective.

Availability of credit is unavoidably tied up with ease of transfer of land titles in terms of ownership, which is an extension of the sort of ownership a country has privileged, or in that same sense, portions of land that are transferable with ease compared with those that are non-transferable or non-credit attracting.

Roughly it is said that about ten per cent of Kenyan land is fully owned privately, in the sense of not being communal, with extended rights for a specific ethnic group or clan. The right figure for South Africa is about 20 per cent, and Tanzania two per cent.

It is hard to qualify two per cent of land in Tanzania as fully privately owned, but it makes sense in the sense of value of land that can change hands rapidly either by personal transaction or court order, whereas the portion of vastly larger for Kenya.

As for South Africa most people would think of it as fully entrenched in private ownership of land, forgetting that so many zones in the rural areas are entrenched tribal areas, the foundation of the old policy of 'separate development,' upon which nominally independent states were created. These zones are a psychic cornerstone.

To make a 'linear progression' cumulative calcul of opportunities, one needs to take the spread out of land that is easily transferable as attracting capital on the one hand. All the three are weak on this score, as land shifts within the local setting, while urban land is available for larger investors to build hotels, office blocks, etc. Rural land dynamism is higher in Kenya for its smaller scale of ownership, chiefly.

On that score one can see that though South Africa is a much larger economy, its microeconomic performance doesn't seem to rival that of Kenya, where communal antipathies are higher, but class-based grassroots revolt nearly absent.

South Africa has higher populist pressures than Kenya ever had, as ownership in Kenya relates chiefly to a local class of landowners and numerous small owners, thus it is ethnic intrusion that is fought, not ownership per se as in South Africa. Tanzania on the other hand has rising capitalisation on urban land, burning fingers with rural land.

It is probably in acquisition of shares and opportunities in that field that the three economies are vastly different, and which give them their specific status.

While its agriculture is performing, Kenya's stock market has been quite dynamic owing to equal conditions for operators or management recruitment where no one shouts that a 'Boer' is now the general manager, and when the government is in some joint venture (as in Kenya Airways) it is a better investor than the partner, while here the government is the cheat.

This partly whittles down Tanzania's opportunities totally.