WHY THE DOLLAR IS CHEAPLY DATING OUT OUR SHILLING.
Today I want to explain why our shilling has become such a cheap girl in town.
But before I talk more of this, about it …….let me shift the blame to its handler….CBK
In monetary economics of exchange rate,………..we have what we call efficiency of foreign currency supply relative to volatility of demand…
What do I mean by this………..
What I mean is ………..that currency value is determined by demand too……………
But when you go deeper in to this studies ……….you will get what we call foreign currency supply ability over expected demand upsurge.
The difference between the two is simply demand gap over supply ability…then………just as a pendulum which balances in the middle a currency rate of exchange will be said to be in harmony or at equilibrium when either the balance of payment is balanced …….or the inflow and out flow supply of foreign currency is tallying out with the balance of payment.
Or in further sense.. the Balance of trade value in due, tallies with future expectation of foreign currency demand……off course you must have been taught this in class for those who covered monetary economic of international trade.
So every time the balance of payment widens negatively to, one side ……………..it means that the supply of foreign currencies in that country will not be sufficient, thus there will less of it …much less than it is demanded for other foreign purchases or settlements.
Alternatively ….if there arise a situation which hinders the flow of a particular foreign currency into a nation ……..it is evident that ……that foreign currency will be expensive in that country, as less of it is coming in now………..much less that it is needed for other foreign settlements.
Notwithstanding the two………if particular goods or commodities….imported by a certain country becomes expensive in its country of origin……….then that higher payment by the importing nation will lead into scarcity of the currency of the exporting nation in the market of the importing nation……..as more of the exporting nation’s currency will be needed for the same quantity of goods over the same period.
Hey…hey…hey…hey…..i know you nearly bit off your tongue here……this is not tongue twisting…no…
So if you do not know how to track and detect supply efficiency of a given currency in a given country …..Over the expected demand upsurge or demand dwindle…………then you can’t tell why you are buying or selling a certain currency.
……………..SO WHY IS THE DOLLAR DOING OUR CURRENCY……………..
Heheheh…….it shall be done…..bado…….! ! ! ! !
Once again………….. Our CBK
Let’s find out what makes the dollar cheap or expensive in our country first. By the way….i got shocked the other day when I saw on the television THE CHAIRMAN OF DYER AND BLAIR……….praising the high level dollar explaining how good it is for the economy due to exports………uuuuuuuuuiiiiiiiiiii…’’.bwana ‘’investor......’’hujawahi jua ati’’ your country is a net importer ….and being a net importer …an expensive dollar will always import inflation…….as for me,i will blame the whole inflation saga on weakening shilling.
……hey…..hey …hey …sorry …..Ours is not inflation…….in better terms…, call it stagflation…and I will be happy.
Anyway ……..lets go back to our discussion …so that we be able to identify why the dollar is expensive now.
Let’s look at inflow and outflow of the dollar first;
INFLOW;
The dollar comes into our country through tourism and agricultural exports……right! ! ! ! !
OUTFLOW;
The dollar flow out of our country via imports and other international purchases.
So when one of this (outflow/inflow) is hindered in any way …then there will be a destabilized supply.
For instance when the inflow is hindered, there arise a shortage of dollar supply over the same demand, thus high price value.
And when the outflow is hindered the dollar supply, surplus our market more than there is a demand for it thus it become cheap.
So…what really hindered the flow of the dollar in our country…………..
Assuming that every week a certain percentage of dollars leave and other come in to our economy………it is as such cases when the flow is smooth that the exchange rate can be said to be in harmony, balanced or at equilibrium …., by the way…. Equilibrium here doesn’t mean equal literary…….no….i mean smoothened ….there is no way an economy can attain full equilibrium of exchange rate, never on earth.
However, in our Kenyan case here, we had the dollar flow hindered by several factors which our CBK decide to ignore, and those are the one hitting us hard today.
We know very well that we export a lot of horticultural products, plus coffee and tea every day…..okay.
This export brings us foreign exchange mostly inform of dollars which helps in harmonizing the exchange rate stability.
Then early last year, around March and April there…… we had volcanic ash which disrupted air traffic for several weeks.
This made it impossible for us to send our products outside, which means there was little dollars inflow here in Kenya.
That is the first place where our market started to get scarcity of the dollars.
Our CBK knowing too well that there are unfilled pockets of dollar supply in our economy………we moved on to 2010 referendum in August which slowed business activities and even made investors to offload their portfolio from our financial market due to fear of political uncertainty.
This made it there to emerge an upsurge of dollar demand in our market ….more than it was flowing in while those guys were converting back to dollars, to hibernate their assets abroad in order to watch the Kenyan scenario from a distance. off course it should be watched from a distance ….why lie….! ! !
As in less supply as it was …this unprecedented demand made the supply of the dollar in our market to diminish even more …not forgetting that….the supply shortage of during volcanic ashes was still unfilled.
Such an upsurge of demand during flight to safety, over previous supply inefficiency in March and April, coupled with weak supply due to less business activity ahead of the referendum, brought about a disrupted circulation which led into scarcity of dollars in the market.
Our CBK assuming all these, we moved into season where we get the largest portion of dollar inflow, this being Christmas season, as tourist comes with their dollars in large numbers which harmonize demand.
Usually when we get this inflow, we outflow it in the first quarter of the year, where demand for the dollars is very high, as companies rush to make international purchases in order to restock following massive consumption during Christmas festivities.
There is a large demand of dollars too during this time due to purchasing of agricultural inputs like fertilizers,etc…and do not forget that ‘’ wale wanabiashara huleta bidhaa kutoka china, middle east na kwungineko……’’are also queuing to buy the dollar as they too have to restock after a big sale out during Christmas……
Therefore, the entire dollar brought in during Christmas holiday by the tourist really helps to balance out this kind of demand …thus harmony in the exchange rate market…..
Then what happened in December…….hehehehe…we did not get enough number of tourist as usual because there was a very heavy snow which once again curtailed air transport ……meaning what,…..as much as we did not get the usual numbers of tourist in our country the same we did not had enough amount of dollar inflow to cater for this kind of demand which is there now.
Our beloved CBK doesn’t have strategic currency reserves ……..hehehehe….have a look at this just recently an earthquake took place in Japan ……so far so good the Japanese govt has already pumped in closely to 300 billions dollars in to its market from their strategic reserves to salvage the economic situation.
Then what would have been wrong with our CBK to purchase the dollar at Ksh 60 ,then…and reserve it in the strategic currency reserve then…use it today to supplement this gap that is bringing this escalating dollar to hit us this way……?...anyway that is part one……. the following is………………….
…………………..HOW THE DOLLAR IS DOING OUR SHILLING USING OIL……………
If I am not wrong…..our CBK has got the finest brain of economist in its closet.
Now…….if this economist from CBK did not know that the crude oil is going to appreciate in price at the international level ……I wonder who else should know.
High price of crude oil at the international market has also played a big role in hindering out dollar flow.
These high crude prices accelerate excessively in flowing out the dollars from our market too.
Before that, remember our economy is already anemic of the dollar supply, as I have explained there before.
Therefore, when the price of crude oil goes up at the international market, the multinational oil dealers are forced to give more dollars, over the same amount of oil.
For instance ……….lets say a barrel of oil is costing around us dollars 60 at the international market, and shell Kenya buys 100 barrels of oil from the international market ,then it is true that shell Kenya will have to pay US dollars 6,000 ie ( $60 X 100barrels = $6,000)
If the price of crude oil appreciate up to $90 per barrel………then shell Kenya will still buy 100 barrels but this time round pay out US dollars 9,000.
See…….. ! ! ! ! ! !..............there emerge a new demand of US dollars 3000,that was not there before.
Now that the supply efficiency wasn’t prepared for this new demand upsurge, automatically this will lead into volatility of dollar price out of its scarcity……………….Right…. ! ! !
Imagine an economy like ours facing this as it is now, yet it still has wounds of empty pockets of unsupplied dollars.
In this situation like the Kenyan case, even before the oil price escalated to those levels following political instability in the Arabs nations, our market was already having shortage of dollars as earlier explained.
Then, there comes, this high level price of oil, which flow out excess dollar in our market, in spite of the already insufficient supply……
That’s why we have some unbelievable developing here, where by the dollar is losing in the international market as weighted by the dollar index basket ,yet it is having good times cheaply with our shilling here…………did you note that.
That categorically shows you how the problem, is right here with us which I have explained.
Truly the dollar must trade at such unprecedented levels, am not even surprised to see it dating our shilling at the highs of 90……..who knows…..
Your future depends on your dreams so go to sleep !