An online discussion with business journalists on twitter this morning regarding the IMF’s role in the Kenyan economy resulted into a heated discourse with the Star’s James Mbugua saying “Why is the IMF more concerned with Inflation than growth? They’ve messed us up”. He went on to say “Everything that Central bank has been doing has IMF written all over it.”
For those not in Kenya- the shilling has weakened to a 17 year low against the almighty dollar- due to a combined number of reasons, mostly blamed on erratic international crude prices and a strengthening dollar, and the issue of speculation has not also be ruled out.
Now a weak shilling has a ripple effect- there are those that benefit, especially exporters, in our case, horticulture, coffee and the tourism industry, fall under the winners. But the losers are more. Being an oil import dependent economy- the price per liter of fuel has been on the increase in recent months. This has had a domino effect on manufacturers who rely on fuel for transportation and energy when electricity fails. And talking of electricity- the fuel costs generally push up the bills that arrive in your post office box every month.
Now with that in mind; there are monetary policies which basically have 3 instruments that Central bank can use to bring about price stability in the economy. When there’s a high dollar demand, the shilling weakens; The CBK can buy securities in exchange for money stock ( To increase liquidity in the market)-or vise versa, hence creating an equilibrium. There are other more complex instruments, such as the interbank over-night lending rates. It’s a short term financing tool with punitive interest rates, leaving the central bank as a lender of last resort. This article by the Business daily explains this as well as updates us on the latest on this.
So how does the IMF come in?
Because it is in times like these that the expertise and much needed dollar injection can offer some stability to the shilling while the economic expertise can advice Kenya on successful ways of handling the crisis. Many feel that the IMF hasn’t acted in the interests of ordinary Kenyans as an ailing population.
The Fund- as it is known in other quarters has been blamed for concentrating more on the issue of inflation, which some say is just a symptom, other than the actual problem. At a press briefing with Antoinette Sayeh the IMF Chief for Africa, at the IMF Annual meetings in Washington, I asked her about the IMF’s focus areas in relation to inflation and growth-and her concern was that Inflation is not a problem in isolation and must be addressed as a matter of urgency. She says that the Central bank must be wary of fiscal and monetary policies that are overly loose (meaning the government has a larger role in promoting economic well being) and should focus on tight monitory conditions. Economists who support a tight fiscal policy say that a government acts best when it acts least; ideally this promotes low taxes and spending and ideally limit government involvement to the setting of prevailing interest rates.
So are we too deep in? Is CBK already being overly loose? Can the free fall of the shilling be left to the mercies of the markets? Will IMF’s injection of dollars through an Extended Credit facility stem the capital outflow and introduce stability to a shilling that has hit a 17 year low?