Weak Shilling:Perhaps We need a Layman's Approach,

I have been following the debate about the Kenyan economy keenly albeit my limited economic know-how.Perhaps I am more concerned with the duration that it has taken to solve this problem,given the CEO of the country is an economist himself.
The man who is entitled with the responsibility of maintaining Consumer & Investor Index  at CBK doesn't seem bothered neither;i have watched him smile and fidget with his seat as he talks about the weakening shilling.I think i am more in love with his dimples than with his approach towards this crisis.
But what exactly could have caused this almost hyper-inflation?
 If we define the Inflation in Kenya as a general rise in price levels of goods & services,what caused it then?Let us try to look at some causes of inflation.

1.Change in Value of production of goods.
Oil is one of the most important commodities of production in an economy.A supply shortage is likely to skyrocket prices of goods since producers transfer high cost production prices to customers as prices.As we accept that the Libyan Crisis has really hurt our economy and that of the entire world,we cannot ignore the fact that Kenyan economy is run by a certain clique of cartels.If as a country we do not have oil reserves,and if they exist,cartels collude and set exorbitant prices,then we are a failed state.We also know that when prices go up in an economy,under-market(black-market)emerges,hurting consumers badly.

2.Currency Depreciation
The purchasing power of the shilling has gone down;the shilling buys a lower percentage of goods than it used to during non-inflationary times.We now need more money to buy less goods and hence increase in money demand.
Kenya imports more goods than it exports;therefore causing a trade deficit.Since we trade in dollars,the value of the dollars we import exceeds the value of dollars we export,therefore making the Kenyan shilling depreciate against the dollar.

 3.Growth of Money Supply.

We saw it happen in the US in 2007/2008,when banking institutions decided to get careless,when the housing bubble built up,when one could get a loan as long as they wanted to.But later the bubble did burst;so will the Kenyan Credit bubble in the near future.Loans allow Producers and Consumers to borrow,therefore increasing Consumption and Investments.This is attractive to an economy since there is rise in GDP and hence the well-being,but not when people take 'bad loans',when people fail to realise that loans are 'liabilities'.

Let us now look at some of the measures the CBK has taken against/ should take to curb inflation ,and see who gains/looses.

1.Monetary Policy(Interest Rates)
Low interest rates encourage people to borrow more.Mostly used as  an anti-recessionary tool,it expands business since people buy houses & cars for example,therefore strengthening the market for those things(no more scarcity)This pushes prices of these goods down and many people can be able to purchase them.
Winners
Consumers & Investors-Consumers spend less to repay loans and therefore have more disposable income to spend in purchases they want to(increased purchase of holidays,luxury etc)Investors will also be willing to take up loans and invest since they are paying less to the bank.
Loosers
Lenders(Banks)
They take a blow of less return on their loans.Low interest rates means more disposable income to people,which they are more like to spend than save.

The opposite is true for High Interest rates.However,Foreign investors will be attracted by high interest rates since money follows money;they want a high return on their investment and high interest rates can deliver.
When this happens,the demand for local currency(Kenyan Shilling)will rise driving its value in the international market.This is what Prof Ndung'u is aiming at;and if he succeeds,our poor shilling may soon find its lost glory.
Winners
Consumers-Prices of goods will be stabilized
Foreign investors
 Kenya's Currency(KES)-It will gain value
Banks-they will get high return on their loans
Loosers
Stock Markets-to them,high interest rates are bad,they are not attractive for business expansion)
Borrowers-Will pay high loan interests (including those that had not taken fixed-interest loans.)
People will loose jobs(unemployment due to slow growth)

2.Trade Deficits(Balance of Payment)
Kenya imports more goods and services than it exports.This has with time enlarged our trade deficit.Kenya being a developing Nation needs to exploit her comparative advantage and exploit/optimize its resources efficiently.Relying on rain- fed agriculture and  hydropower(which is expensive & unreliable) in this era of technological developments and  huge climatic changes coupled with stiff competition will see us lag behind.If investors can find cheaper and reliable energy options else where,why would they invest in Kenya?

Direct Foreign Investments is another measure that can put us at a front,but not when many investors still shiver when they recall the 2007/2008 PEV crisis.The Governments needs to reassure and re-attracts FDIs;Outsourcing is nothing compared to the spill-over advantages that we are likely to gain from these FDIs.Kenya boasts of a rich human capital resource;Google is investing in the 'silicon Valley of Savanna' since they have seen it  a great potential.But we need to ATTRACT and RETAIN these investors;that is how China moved from an IMITATING to a PRODUCING Country.
Political risks also counts a lot and we have to convince Investors that never again will this happen;The Hague  outcome will have a great impact on this.

Well,i think I had mentioned earlier that I am no connoisseur of Economics!!Let me stop there because i am afraid I am just about to become a Keynasian!!
We will continue from here....

Meanwhile,great weekend ahead!