Speculation brings winners and losers

In Summary

• The shilling has appreciated from around 165 to the US dollar to around 130 today

• Exporters gain from a weaker shilling but importers have to pay more

The Kenya shilling has now appreciated to around Sh130 to the US dollar when it was Sh165 at the beginning of the year.

The IMF complained that the shilling was being artificially propped up during the Uhuru government when it hovered around Sh100 to the dollar. Central banks influence the exchange rate by raising or lowering interest rates or by buying or selling foreign currency. The IMF thought the true value was around Sh125 to the dollar.  

Speculators in both directions burned their fingers. Many people  bought or held onto dollars expecting that the shilling would depreciate further. They lost out when the shilling appreciated in February after it became clear there would be no Eurobond default.

Speculation plays a useful role as it smoothes out volatility in markets.

Sensibly the government now seems to have decided to let the market decide the value of the shilling. Exporters are better off when the shilling depreciates but it is easier to import and repay foreign loans when the currency appreciates. So let the shilling float freely to its natural level to avoid creating distortions in the economy.

Quote of the day: "I like whiskey. I always did, and that is why I never drink it."

Gen. Robert E. Lee
He surrendered, ending the American Civil War, on April 9, 1865

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