Hi all,

The currency wars going on between China and USA is quite interesting but also helping us learn a few tricks here and there thus providing us with an opportunity to rethink about our currency.-Ksh

While USA was busy fighting in Iraq and Afghanistan China was busy buying US treasury bills,bonds etc ,as of July2010 report China has over US dollar 2.1 Trillions in these fixed markets .which is equivalent to 2.1 by 80=Ksh 168 Trillions.in Kenyans

What we can more provocation to China may result in China opting to easily dump those US bills and bonds creating the largest economic disaster in the world.But it wont take that path because its economy is export based hence a lot of care will be taken.

Changes in the exchange rate can have a powerful effect on the economy – but these effects take time to show through. There are time lags between a rise or a fall in the exchange rate, and changes in variables such as inflation, GDP and exports & imports.

A high shilling value leads to lower import prices – this boosts the real living standards of consumers at least in the short run – for example an increase in the real purchasing power of Kenyans when traveling overseas for business trips,leisure,buying foreign goods and services

When shilling is strong, it is cheaper to import raw materials, components and capital inputs – good news for businesses that rely on imported components or who are wishing to increase their investment of new technology from overseas countries.

Will benefit KPLC,Bidco,Kengen,Airlines fuel etc

Also a strong exchange rate helps to control inflation – domestic producers face stiff international competition from cheaper imports and will look to cut their costs accordingly. Cheaper prices of imported foodstuffs etc. will also have a negative effect on the rate of consumer price inflation.

However cheaper imports leads to rising import penetration and larger trade deficit e.g. the 20bn trade deficit in goods in late 80s ,this is why firms like KICOMI,Rivatex, others went belly up

Exporters lose price competitiveness and market share – this damages profits and employment in some sectors – notably manufacturing industry in the last three years

If exports fall, this has a negative impact on economic growth.

However it should be noted that business can adapt to a high exchange rate. There are ways in which industries can adjust to the competitive pressures that a strong shilling will impose. Some of the options include:

* Cutting export prices (lower profit margins) to maintain competitiveness and market share
* Seeking productivity / efficiency gains to keep unit labour costs under control but this will raise another squabbles with labour union like COTU under Mr Atwoli
* Investing resources in new product lines where both domestic and overseas demand is more price inelastic and less sensitive to exchange rate fluctuations. This involves producing products with a higher income elasticity of demand, where non-price factors are more important in securing orders.
* Moving production in areas that are assumed to have low labour costs. like moving it to North Easthern,Kisumu,Juja etc

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Thanks
Gibson Amenya
Enigma Consultants Kenya Limited
Email: gib.amenya@enigma.or.ke
Email:info@enigma.or.ke
Audit,Taxation and Business Advisory Services