There has been a lot of debate recently over the International Monetary Fund (IMF) and its purported motivation for weakening the Kenyan Shilling about the US Dollar. Understanding the reasoning for such a decision is essential, even though the subject may seem complicated and packed with economic jargon. This blog tries to clarify the rationale behind the IMF’s possible support for a weakening of the Kenyan Shilling against the US dollar.
What IMF Does
It’s crucial to grasp the role of the IMF in general before getting into the details. The IMF is a global organization whose goals include fostering international monetary cooperation, ensuring financial stability, facilitating trade between nations, encouraging high employment and long-term economic growth, and eradicating poverty worldwide. The IMF helps member nations with their balance of payments as one of the ways it accomplishes these objectives.
Why Depreciation, you may ask?
Increasing Exports: The IMF may advise a depreciation of the Kenyan Shilling to increase the country’s export competitiveness on the world market. For international consumers, a country’s goods and services become substantially more affordable as its currency depreciates. The potential boost in exports that could result from this could spur economic growth and create job opportunities.
The rectification of trade imbalances: Kenya, like every other nation, has a trade balance that shows the difference between its exports and imports. A nation experiences a trade deficit when its imports exceed its exports. Currency depreciation raises the cost of imports, which could influence domestic consumers and businesses to favor locally produced items. This can assist in reducing the trade deficit and balancing out trade imbalances.
Overseas investment: A country may be more appealing to overseas investors if its currency is lower. Foreign investors can pay less for assets in a country when its currency appreciates. This might increase foreign investment, which would spur employment growth and economic expansion.
Reducing the Cost of Servicing Debt: If a nation has a sizable amount of debt in foreign currency, depreciation of its currency might help ease the cost of servicing that debt. While this may offer short-term respite, it’s crucial to remember that relying too much on currency depreciation to manage debt might have unfavorable long-term effects.
Fighting Deflation: Deflationary pressures can be fought via depreciation. Increased import costs as a result of currency depreciation might help avoid or lessen deflation, which is a persistent drop in the level of prices for goods and services.
Conclusion
It’s crucial to understand that currency depreciation is not a magic cure for all economic problems, even though the IMF’s support for a weakening of the Kenyan Shilling about the US Dollar may have sound economic explanations. Depending on the unique conditions of a country, depreciation can have both beneficial and negative effects.
