East African countries’ currencies have of late experienced a weakening trend, with most of them, within a short period, losing over 10 per cent of their value to the US Dollar. Currency exchange rates are quoted as relative values; the price of one currency is described in terms of another, which, in turn, reflects the economic status of the country with a weaker or stronger currency. In simple terms, the weakening of currencies also reflects structural weaknesses such as large external trade deficits. These relative values are caused by the demand for currency, which is, in turn, influenced by trade. If a country exports more than it imports, there is a high demand for its goods and thus for its currency. Supply and demand principles dictate that when demand is high, prices rise and thus the currency appreciates in value. On the other hand, if a country imports more than it exports, there is relatively less demand for its currency, so prices should decline. In this case, a currency depreciates or loses value. The balance of trade influences currency exchange rates through its effect on the supply and demand for foreign exchange. When a countrys trade account does not net to zero – that is, when exports are not equal to imports – there is relatively more supply or demand for a countrys currency, which influences the price of that currency on the world market. Precisely, our economies are increasingly experiencing balance of payment deficits. We are importing too much while exporting too little making it vulnerable to shocks and not ready to support internal or external effects. The gap between imports and exports needs to be financed by financial inflows other than export earnings. Though it is said that the dollar measured against other currencies has reached the highest level this year, fundamentally our currencies are being affected by reduced inflows from tourism, exports and agriculture as well as manufacturing. Another critical factor is the rising import bill, especially on capital goods necessary for the increased infrastructure and development. At the same time, East Africans continue to consume more and more goods – mainly imported – trying to fulfill the thirst for a better lifestyle via new cars, phones, tablets and more. These goods of ostentation as our economists call them can not in any way promote our development. These goods of ostentation where the main attraction is related to its image as being expensive, exclusive and symbol of social status cannot take us far. These goods we buy in order to ‘keep up with the Johns’ can cost us more than we can realistically afford. The good may give little actual utility apart from the pride of owning something very few other people own. It is visibly seen that today we have to dig deeper in our pockets to acquire some of these stuff. The worst comes when the same has to be especially on basic commodities. This will bring about constraints as there would be no corresponding increase in household earnings. Our emerging markets have become darlings of international investors over the past decade, attracting capital to their fast-growing industries and delivering a boost to the global economy. Unfortunately, our markets have an inherent weakness. Few of these investors are willing to stockpile our currencies because they see them as unstable and volatile. That is why, if cracks are detected, investors dump our local currency and extract dollars, leaving behind devalued shillings and francs. This dynamic in another way also contributes to the fluctuations of our currencies now and then. Central banks and finance ministries have few options once these currencies start plummeting, even though often intervene in exchange markets in what is usually a futile effort to stabilise the rate. We have seen these happening across the region and elsewhere in the world. Many economists cite the importance of acting before the crisis. But individual investors and some policymakers have found this difficult, especially in euphoric eras when they are keen to maintain rising profits and growth despite looming risks. In the first place we could be paying a heavy price in this regard for not having implemented tighter fiscal and monetary policies when market conditions were favourable. Basic principles of economics say that, for any country, a widening current account deficit and a rising debt level will eventually herald a weaker currency. Common strategies by central bankers when there is current account deficits to support currencies by raising interest rates, thus making domestic financial assets more attractive to foreign investors, may end up slowing down the economy contrary to their expectations. It is necessary for policymakers to make adjustments early and quickly enough to avert any economic discomfort created by our weakening currencies. At the same time we need to start a campaign of encouraging consumption of what we produce as opposed to giving preference to what we do not produce as East Africans. Oscar_kim2000@yahoo.co.uk
