The shilling continues to free fall against the US dollar. Clearly, the recent steps taken by the Central Bank of Kenya (CBK) to curtail liquidity in the system to curb speculation in the market and to raise the cost of money seem not to have yielded the desired results.

The fall also proves that the currency is not under pressure because of excess speculation but because of external factors such as a strong dollar and because of fundamental weaknesses of the economy.

The only lasting solution for the shilling’s problems is to reduce the current account deficit (CAD) to a sustainable level.

To do this, we need structural solutions from the government, not the CBK. We need the government to come up with out-of-the-box-thinking’ solutions rather than leave everything to the apex bank.

The CBK has very little policy space or instruments; all it can do in the interim is to stabilise the market volatility and that will come at a cost; high lending rates and low economic growth.

It is time we came up with strategies that will help curb forex outflow against a backdrop of a weak currency. The depreciation of the shilling against the US dollar by more than 10 per cent this year has added to Kenya’s economic woes and could push its CAD to unprecedented levels.

The government can help contain CAD by embarking on a shilling-centric approach to oil imports. This envisages bringing down the CAD by cutting down on dollar-denominated oil imports, which is the largest component of our import portfolio.

One of the ways we can do this is to rely more on shilling-based crude oil imports from countries like the UAE and Iran. At this juncture, it is easier to negotiate for such an arrangement as oil-producing countries are likely to offer concessions given the current supply glut and the need to protect their market share.

It is basically a marriage of convenience: Oil producers need to sell crude and we need to buy it without aggravating our CAD any further.

So how does it work? Kenya’s import from UAE, which is mainly oil, stands at over $1 billion (Sh100 billion) annually.

Kenyan fruit, vegetables, nuts, fish, coffee and tea are popular in the UAE and many shops in the Middle East. UAE alone is among the leading import markets in the Middle East for Kenyan agricultural products with annual trade worth around $300 million (Sh30 billion).

This means we can negotiate for a trade agreement that would help us reduce oil dollar demand that is at least equal to our exports to the UAE and other middle eastern countries.

This is how it works. We pay for UAE and other middle eastern oil and gas in shillings deposited in their government’s bank accounts in one of our local banks, which they can use to pay Kenyan exporters who supply them agricultural produces like tea, coffee.

If we can do this kind of barter trade with the oil sheikhs, it means we will take $300 million (Sh30 billion) or approximately 20 per cent of annual oil dollar demand out of the equation.

Such a mechanism will not only save us foreign exchange, but will also help narrow the balance of trade between Kenya and these countries as these countries would most likely use the excess shillings in their Kenyan accounts from the sale of oil and gas to buy more Kenyan goods.

This will help arrest the fall of the shilling since domestic oil marketers wouldn’t need to buy as many dollars. It will also reduce CAD given that oil constitutes more than 20 per cent of our import bill.

Given that the money paid to the foreign oil suppliers such as Abu Dhabi National Oil Corporation (Adnoc) will be considered as income generated by a foreign firm in the country and liable to be taxed, these companies under such an arrangement should be exempted from tax. It is a win-win case buying the oil in Kenya shillings.

We will not be the first country to do that. It has been used to promote US trade interests and has also helped the US dollar become the global currency.

In 1973, a deal was made between Saudi Arabia and the US, as per which any country willing to purchase oil from Saudi Arabia was to pay in no other currency but the US dollar.

Crippling bill

In return, US offered Saudi Arabia weapons and military protection for their oil fields. More recently, when Iran faced sanctions over its nuclear programme, Indian oil companies were paying for up to 45 per cent of their dues for crude in rupees. The Iranians then used these monies to buy food and medicine from the Indians.

This is the kind of barter trade we need to do with our oil suppliers and protect the shilling.

Source: Business Daily

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