Conventionalism, challenged trade and investments

DIFFERENT COUNTRIES have different currencies. There is a need to buy goods and services across borders, especially with the vast extent of international trade in the 21st century. The world has indeed become ‘flat’. Exchange of currencies is hence important in achieving goals of international trade. Most foreign firms bill their international clients in either US dollars or in their own local currency hence pushing importers to get either of the currencies, which brings foreign currency exchange into play. Exchange rates have a role to play in ensuring a stable macro-economy with its impact influencing a country’s interest rates and inflation levels. This, therefore, makes it important for governments to ensure desirable exchange rate levels are attained to spur growth. To achieve this, governments have an option of choosing between floating (fiduciary exchange rates) and fixed exchange rate regimes. The latter refers to the exchange rate regime mostly advocated for by Keynesian economists, where there is intervention by the government in terms of the rate at which the currency of that country is traded. This could result in devaluation or revaluation of the rate of exchange by the government depending on the prevailing market exchange rate. However, this regime is against the free market ecomony ideals and proper international business relations among countries of the world. On the other hand, the floating exchange rate regime is where the forces of demand and supply for a particular currency dictate the rate at which one currency would exchange for the other. It is worth noting that the currency market is the most explosive market, moving over $3 trillion daily (globally) compared to stock markets that only moves up to $25b daily. A unique feature between the two is that they are accompanied by speculation. However, I will try to underpin the not so traditional methods of trying to achieve a stabilise exchange rate against some of the hard currencies. A few years back, something happened in one of the East African economies which might be a key learning point for the rest of the region, Rwanda inclusive; the Kenyan shilling was declared the worst performing currency in October 2011 after a nose dive drop against the US dollar. The unit hovered dangerously above the 100/1 (sh100/$1) mark when the average rate two months earlier had been 80/1. The Central Bank of Kenya had its job cut out to ensure it stabilises the local unitg. In response, the bank engaged mainly in repos, that is, repurchase agreements and the other traditional monetary policy intervening tools to improve the exchange rate. But was this approach effective? Were there any other options available to the Central Bank of Kenya? When look at the main market fundamentals that would put any economy in such a precarious condition, that is especially for the majority of the citizens except for persons paid in dollar. It should be noted that some of these fundamentals are interrelated to a large extent to those that influence inflation. Remember, in a floating exchange rate regime, the forces of demand and supply dictate the rate of exchange, meaning that the more your currency is demanded, the more value it gains. So, do we need to ensure East African currencies have a sustained demand when paired against the hard currencies of the world? World over, the US dollar is used for most international transactions. An increase in its demand by most East African importers means that the currency will appreciate against East African currencies. This mainly because the region is a net importer; however, there is a twist and a tradeoff to this position. It is important to understand that with a depreciated local currency, our exports become cheaper hence more attractive to other countries. This means that a devalued currency gives the region an opportunity of exporting more as long as we have locally-denominated invoices. The only question would be; what precisely are we exporting? Do we have quality products that meet regional and world standards? This underlines the need process locally-produced commodities to improve their value. Value addition can also be ensuring high-quality branding, labeling and packaging of our exports. Must we import? Every time a depreciating local currency is attributed to the increase in demanded imports, the question should then be; what are we importing more that we were not importing previously? The answer should only relate to items that economies cannot produce locally. The wrong answer would be; “We had to import some food products”. East Africa has the capacity to be self-sufficient in terms of food production. Any trading in food items should be within the East Africa Community. This will potentially reduce the demand for the hard currencies and spur local production. Continued importation of goods that can be locally-produced, trickles down to the level of inflation we feel as a country once the imported goods are sold to final consumers. We do of course envision a time when the East African Community would be a full Union, with a common currency and hence streamline the intra-trade. East Africa is growing. Its potential is rising. Economic empowerment is looming. The economies are expanding. To achieve appealing levels of full employment, low inflation, stable currencies and desirable exchange rates, the region should have full participation of government, para-government and private individuals and institutions. Private individuals and institutions will do well to bring forth ideas and capital innovation and investment while governments will provide a conducive atmosphere to do business that will stimulate growth. The writer is a senior auditor at KPMG Rwanda. The ideas presented herein are the writer’s personal opinion and do not in any way represent KPMG views.