By Jaindi Kisero

Nairobi, 28 November - 2007ALL HAIL THE POWER OF the shilling. You can now buy the dollar at as low as Sh63 - the highest level for the local currency in nearly a decade.

If I were a chief executive officer of a motor assembly company, I would take advantage by importing all the vehicle assembly parts I need to last me two years.

If I were running a newspaper company, I would import all the newsprint in advance to last me two years and lock in the gains.

This is the time for companies to import new equipment such as computers and new software.

Against the Kenya shilling, the dollar is at a level lower than it has even been since the shilling was fully liberalized in October 1993.

This is the time for companies to put in orders for the new limousine they have always wanted to buy for their to executives. It is the time to import all the luxury goods you wanted.

But if you are a company with global operations, or an investor within the Export Processing Zones, it is the time to pack your bags and move some of your business to lower-cost foreign markets.

To the flower- or tea-exporter, the signal from the local currency markets is that they must reduce their operations to the bare minimum, shed off staff, and concentrate on reducing the wage bill. The strong shilling is going to hurt tea, coffee and pyrethrum farmers badly.

On its part, the Government stands to gain. I have just read from the latest review of the economy of Kenya by the board of the International Monetary Fund (IMF) that the Government has accumulated huge external debt arrears.

"The temporary accumulation of external payments arrears is regrettable", says the statement posted on the IMF website last week.

Thus, the rise of the shilling is an opportunity to pay these arrears cheaply.

Even as they hurt farmers, over-valued or misaligned exchange rates benefit the urban-based middle class.

If you have a dollar loan, or you pay your rent in hard currency, or have a child attending university in the USA or Europe, this is the time to lock in gains by making you payments in advance. If you pay your DSTV subscription in dollars, change to shillings immediately. You will be the biggest winner.

Which brings me to the million dollar question: Why is the shilling growing stronger daily against the US dollar? Is the currency misaligned or is what we are seeing backed by fundamentals?

Right now, the talking heads of Nairobi's financial community have a standard response which includes the following.

First, that the dollar has depreciated the world over, and the local currency is merely responding to supply and demand conditions in the international market place.

SECONDLY, MARKETS ARE REACTING to news of new dollar inflows into the economy: the recently announced Sh11 billion deal between Helios Capital of the United Kingdom and Equity Bank, and the Sh26 billion acquisition by France Telecom of 51 per cent shares in Telkom-Kenya.

Thirdly, Kenyans in the diaspora are remitting more money than they have ever done in the past.

Fourthly, international organizations operating in the conflict areas of the region - southern Sudan, Somalia, Burundi and DRC - are keeping all their dollars in Kenyan banks, and they have created an unprecedented regional demand for the shilling.

Specifically, neighboring Somalia is considered to be a major factor in the emerging trends, the argument being that Eastleigh Estate in Nairobi has in recent times become an informal financial hub for remittances by the Somalia diaspora, transmitting millions of dollars every day from Europe, Canada and the USA to Mogadishu.

Today, it is alleged, there are forex bureaux in Eastleigh that handle more dollar business volumes than many large commercial banks.

But when you scrutinize the situation closer, these explanations do not get to the bottom of the phenomenon. Indeed, very little analytical work has been done on the informal inflows said to be responsible for the shilling's climb ,

In a sense, the shilling's climb is paradoxical considering that it is coming against the context of double digit inflation, a wide trade and current account deficit, and in the context an election spending spree characterized by expensive advertising.

Without doubt, remittances are a major factor. But remittances are not documented within the balance of payments accounts. It is difficult to tell just how much of a factor such invisible inflows are.

A strong shilling is not something to celebrate. Governments that over-value their national currencies discriminate against agricultural producers and favor urban consumers and industrial firms.

Currency over-valuation also affects the productivity of the agricultural sector indirectly by increasing the cost of imported inputs.

Over-valuation also increases the cost of labor. Something must be done to stem the shilling's precipitous climb. Immediately!

Source: The Nation