Something is happening in Kenya that has not happened for a long time. A black market is emerging for foreign currency.
This week the Kenya Association of Manufacturers complained that their members were having to pay over Sh120 for the US dollar even though the official rate is 116.
This parallel exchange rate needs to be nipped in the bud before it runs out of control.
Shoring up the shilling is an unaffordable policy, just like subsidising the fuel price.
The US dollar strengthened in the global instability after the invasion of Ukraine. The Kenya shilling has performed reasonably well against a basket of currencies. There is no fundamental reason to prop up the shilling.
Yes, it will be inflationary to allow the shilling to depreciate further but the alternative is to print money to cover government deficits which will ultimately intensify the currency crisis.
The Central Bank should now pursue a policy of managed depreciation and allow the Kenya shilling to float. Then manufacturers will be able to buy all the dollars they need, even if they have to pay over Sh120 to the dollar.
Quote of the day: "You've got to be a thermostat rather than a thermometer. A thermostat shapes the climate of opinion; a thermometer just reflects it."
Cornel West
The American academic was born on June 2, 1953
