The mystery of the devaluing Shilling

People keep asking me the same question. What will the impact of global economic turmoil be on Africa? How is it going to affect our economies? The general consensus seems to be that short term risks revolve around (1) a possible contraction in remittances from the African diaspora (2) reduced demand for commodities and African exports - including tourism and (3) a possible reduction in aid flows due to changes in allocations of donor country budgets. This sounds sensible, but you would think that each of these risks would take some time to affect the actual supply and demand of foreign exchange in East Africa - that the impact would not be immediate.

So what's happened? Well, over the last two months or so, both the Kenyan and Ugandan Shillings have lost more than 20% of their value against the US Dollar - after both having had a long period of stability (indeed strengthening) aganist the Dollar. It's hard to believe that the Dollar supply side has contracted sufficiently rapidly in such a short period, so it must be demand-driven. Bu where's the demand coming from? I'd like to know.

The next question, of course, is about impact, winners and losers. Exporters are quietly celebrating. For a long period during which local inflation was causing wage pressure without the benefit of any depreciation in local currency, exporters of major commodities (tea, coffee, horticulture and other agricultural products) have been struggling. Suddenly, the twin effect of a depreciating currency and rising international commodity prices look set to provide a substantial windfall. Importers, on the other hand, will struggle to pass on increased costs to consumers - and this presents a serious risk, especially in relation to oil and oil derivative imports. Inflation will rise, which will raise the cost of debt (which had been coming down slowly, even if still high by international standards).

Let's hope the exporter windfall brings in enough forex flows to stabilise the currencies. If not, then there's a real risk of forex shortages causing further depreciation, stimulating inflation and causing real damage to the regional economy. Let's hope!