A quick post! I read the newspapers this morning and saw that the national carrier Kenya Airways is now charging domestic passengers in dollars. This follows on the heels of other companies such as CMC Motors and Toyota Kenya who are also pricing their products. Together with my biggest foe Multi Choice Kenya, it seems that more and more companies are abandoning the shilling.

This really frustrates me and should work as a wake up call to the CBK governor who has long been an advocate of "private sector solutions to exchange rate volatility".

For a long time, the CBK in their publications have been against having any capital/exchange rate controls as it goes against the ethos of having a free market economy. In their view, the private sector should come up with solutions to exchange rate volatility through financial innovations such as forward exchange rate contracts. In their rather idealistic world, companies like KQ when faced with the prospect of a weak shilling, should contact their bankers and arrange for forward currency contracts to hedge against the weak shilling. Now, the simple question is this; If KQ, a company domiciled in Kenya, which mark you has a functional currency, can charge in dollars; why on earth would they bother taking forward contracts to hedge against a weak shilling? They have a natural hedge as they simply switch their pricing to the more stable currency, and in addition, book decent exchange gains as they report their annual statements in the weaker Kenyan shilling.

In essence, if the CBK and the government want to deal with the currency issue, they should start by making sure that all companies in Kenya are in charge of their own exchange rate risk. Companies like KQ, CMC Motors, Toyota Kenya and Multichoice should all price their products in the Kenyan Shilling. This would first of all ensure that companies take control of their own exchange rate exposures and importantly for the economy, it would allow the exchange rate to perform its most pivotal function; to act as a pressure valve in the face of current account imbalances. A weaker currency always acts to turn trade deficits into trade surpluses and a strong currency does the opposite i.e. turn a trade surplus into a trade deficit. It's simple economics and the CBK should start thinking about making economics work in Kenya. If you travel to South Africa, you will notice that even their duty free products are priced in the Rand. This actually goes a long way in stabilising your currency. To me it seems that the Kenyan economic policy makers follow the Reagan School of Economics, following voodoo economics that clearly don't work.