How has Kenya and Uganda got it right for their currencies, but we haven’t By Paul Chow
I write this short article as a reflection during my journey back home from Uganda last weekend. I went there as leader of the Democratic Party to take part in the Annual Conference of the Democratic Union of Africa (DUA) held in the Ugandan town of Entebbe, on the shore of the largest lake in the Africa – Lake Victoria. The DP is a fully-fledged member of this African organisation which gathers together political parties with centre or centre-right policies. On the way to Uganda I had to pass through Kenya, a country I have grown to know so well over recent years.
Both of these East African countries are very poor. Their combined population are in excess of 65 million. 65% of their population survive on less than one dollar a day. Both countries suffer from under development and, therefore, many of their people have little, and for millions of Kenyans or Ugandans, no income at all. Yet as one walks in downtown Kampala or Nairobi, one is struck by the large number of banks and money changers that are touting for or selling foreign currencies.
In these two countries anyone can walk into any bank or money changer bureau and buy US dollar notes on demand using the local currency. In Uganda, to obtain a dollar costs around 1400 Ugandan shillings. In Kenya, news had already reached us before leaving Entebbe that one would get fewer Kenya shillings than the previous day for one’s dollar. Both the Ugandan and Kenyan currencies are appreciating. In Nairobi, one walks into any bank or money changer shop and on demand buy a US dollar with 63 Kenya shillings.
In both of these countries there is no black market in foreign currency exchange. In Uganda, taxi drivers do quote you in dollars for a taxi ride – especially a long distance one such as going from Entebbe to Kampala. They don’t, however, insist that you should pay them in dollars. Ugandan shillings will do nicely. In Nairobi, taxi fares are in Kenya shillings. In both countries, hotels quote their rates in dollars but take shillings if you offer them.
In both Uganda and Kenya, the shops are full of goods that they do not themselves manufacture, such as the latest electronic goods from Japan, Korea or China, alongside consumer goods from Europe and America. Quality toiletries and other essential household goods that are normally available anywhere in Europe are available in their supermarkets. Shops sell the latest or highest price clothes, perfumes and other luxury goods available in the most prosperous capitals of the world. Indeed, for millions of Kenyans and Ugandans most of these goods in their shops are beyond their means but not beyond their reach, if they have the money in local currency.
In contrast, here in Seychelles, we pride ourselves with high per capita income. At the last count, when the US dollar was still being quoted at 5.50 rupees at the commercial banks, the per capita GDP of Seychelles was estimated to be in the region of 8000 US dollars while Kenya and Uganda can only boast a few hundred dollars. Now that the official rate of the dollar has gone down to 8 rupees, the dollar value of our GDP is only $4,400 dollars, slightly higher than that of Mauritius. In Seychelles the shelves of shops are either empty or filled with goods which are not necessarily in demand. People travel overseas to buy even toiletries. In Seychelles there is very few luxury goods in the shops and the ones that exist are of inferior quality.
Despite the still more favourable picture on GDP – unlike Uganda and Kenya, dollars are not available on demand at the banks or the two licensed money changers in Seychelles. Unlike our poorer neighbours we have a black market where foreign currencies can be bought virtually on demand but at a higher rate of exchange - at a premium of 50% to be exact. As the premium gets bigger so do prices of goods and services as we have realised to our cost. Hence, disequilibrium between the amount of local currencies and the foreign currencies causes inflation.
Why are our two poorer neighbours able to satisfy their citizens’ demand for foreign currencies but we cannot? What are we doing wrong in respect of our currency? The easy explanation seems to be that the amount of local currencies available to buy foreign currencies is in equilibrium by design. That, it appears is the sine qua non (condition) for a stable currency in any country. In Seychelles, this equilibrium has swung too far in favour of more rupees while the exchange rates have been kept constant. Under this condition, the flow of foreign currencies in the banks has been insufficient, causing a shortage in relation to the amount of rupees available to buy them.
Keeping a stable currency has its price. In Kenya and Uganda this price is poverty. Luxury goods are there, but the means to buy them are not necessarily there for many of their people. But poverty exists not because of the currency but because of under-investment.
The argument we have constantly heard in Seychelles is that we are in these economic problems because we wanted to give all our people a house. The reality, of course, is that we are still a long way from giving everyone who needs it, a house. Meanwhile, the disequilibrium between the available foreign currencies and the amount of rupees available to buy them, which we deliberately engineered so we can all get a house, are causing an unintended problem called inflation. Inflation erodes the value of the currency and incomes which makes it looks like we are running to keep still or that the goal post keeps moving back as we approach it. Hence, more people find it more difficult to afford the house they have been promised.
The lesson here is that there is no shortcut to economic prosperity. There is no free lunch. There is only one way to create wealth and that is hard work. But hard work will only be worthwhile if we are able to keep more of our earnings for our own use and prices are stable. Interestingly, the last condition is exactly one of the objectives of the Central Bank as set out in the Central Bank Act 2004. The other, a stable exchange rate is the flip side of the equilibrium between local currencies and foreign currency inflows. .
Getting the equilibrium between the foreign currency earnings and the amount of rupees in the economy back to a stable level is what we need to do. So far Francis Chang Leng is unable to come up with a cogent plan to achieve it and President Michel too does not have any ideas of his own. I have some ideas on how it can be done which I would like to share with you in the next issue.
The writer is the Leader of the Democratic Party.
