IMF makes pretexts in shilling depreciation

BY EDITOR

4th October 2015.

Editorial cartoon

Observers have been stuck in disdain at a formulation by the resident representative of the International Monetary Fund (IMF), Thomas Baunsgaard.

The IMF newcomer to Tanzania told a local daily that the depreciation of the shilling over the past nine months was alright, as it was a perfect natural adjustment placing it closer to its real value.

He attributed the tendency to assertion that local inflation was higher than that of our trading partners, in which case the currency was overvalued last year.

The problem with this assessment is not about economics but logic, for at the level of economics that our inflation was higher than that of most of our trading partners, Baunsgaard is probably right.

While it is true that UK or Chinese inflation rates were lower than ours, that of our major trading partner Kenya,like others, consistently stood higher than our average of about five to six per cent last year.

With regard to this aspect per se, the representative is inviting a quicksand of economic parameters of exporting inflation, as trade with China and Japan is quite often in shoddy goods and second hand cars, respectively.
There is an element of dumping in our principal trade relations for instance with China, and less with the UK or Kenya as they have a few shoddy goods to deserve a dump, except with EU, US  and others when it comes to second hand textiles.  But even in this case, generating any inflation is implausible.

The second sphere of the representative's remarks is in relation to how the value of the shilling is set, and it is chiefly in this area that observers were gasping for breath.

The value of the shilling is always set by the market, and not seasonally adjusted by the Central Bank, in which case it was not a case of devaluation, but rapid depreciation.

There is no way markets could trade at lower than the market value of the currency, and that is where the remarks became meaningless unless the IMF has adopted its own meaning of value.

In that case we are compelled to return to common sense that the shilling was trading at its proper value but rapidly declined.

Here is where the IMF ought to know that the problem was not about inflation but overall shift in global currency values, with a policy shift at the US Federal Reserve Board.

With a reviewing of Fed zero interest rate policy, borrowing quickly became more expensive, and all bank transactions constitute in borrowing currency from the central bank and other banks. That was the core reason for depreciation.

The question that comes up is who was the IMF economist seeking to pamper with rather dissuasive remarks that there is no problem with the currency but chiefly with inflation?

Was he trying to help the government get a 'feel good' mood in that regard, that after all there has just been a correction of currency value but not rapid decline, which impairs confidence in the economy?

Or was it a singular expression of happiness in the depreciation as local assets become cheaper, so foreign companies will have a field day purchasing them?

Is it likely that it was both these parameters, hoodwinking the public not to take any notice of strengths, weaknesses, opportunities and threats on the national economy leading to depreciation?

Why pretend the issue is inflation? They are questions in need of volumes to answer.

SOURCE: GUARDIAN ON SUNDAY