I have been awaken from my deep blogging slumber by an extraordinary statement. In my course of regular reading, I came across the Report by the Parliamentary Select Committee investigating the collapse of the Kenyan Shilling. The basis for their eventual tirade on the banking community as well as the Central Bank Governor is summarised in the following statement;
The Committee received a range of the causes of the fall of the Kenyan Shilling which the committee divides into economic, human and institutional failures. The economic causes such as the wide current account deficit, Euro crisis, large import bill of non-essential commodities, the Arab Spring, are still in place even after the shilling recovered its value in Decemeber 2011. The Committee therefore zeroed on institutional and human failures.
This statement is quite shocking. Let me explain. The currency fell to a low of KShs 107.00 to the dollar in mid October 2011. The key driver was simple, investors stopped believing in the fundamentals that underlie the Kenyan Shilling and quickly began to bet against it. I might confess that I suggested to my former boss that we should bet against the shilling. Nonetheless, these opinions on the shilling were not just based on current fundamentals but also, by forward looking fundamentals. Consider for instance an investor who wants to build a bread factory, his analysis will not only include current demand patterns, but primarily, his analysis will include forward looking demand patterns.
A good investor is one who knows where money is to be made, not where it is being made.
My point is simple, in December, forward looking projections for the current account balance changed significantly. Banks and investors alike foresaw less dollar demand due to higher interest rates. Therefore, their demand for currency begun to favour the Kenyan shilling. Basing the whole report on that statement is simply garbage in garbage out.
Indeed, the report has some good recommendations including boosting the export base, improving CBK communication with the banks and boosting the CBK's regulatory tools. Nonetheless, the report comes about as more of a witch hunt than an investigative report.