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Why holding dollars makes sense for preserving wealth from devaluation

Editor SharpDaily by Editor SharpDaily
October 6, 2023
in News
Reading Time: 2 mins read

Rongo MP Paul Rabuor on Thursday sought to introduce a bill in parliament that he says is meant to support the Kenyan shilling from further plummeting against foreign currencies.

He defines foreign currency hoarding as the accumulation of foreign currencies for speculative purposes beyond reasonable needs.

The bill proposes the formation of a Foreign Currency Management Authority (FCMA) that would be tasked with regulating and supervising the activities of foreign currency market participants. It would be established under the Ministry of Investments, Trade and Industrialization. In Rabuor’s proposal, any entity or person who buys foreign currency must make returns to the authority within 14 days on how it was used. Individuals who break these regulations would be liable for a fine not exceeding KES 1 million while entities would pay a higher fine not exceeding KES 10 million.

Kenya, like its neighbors in East Africa, has had enormous challenges with the availability of foreign currency over the recent past. This shortage of dollars and other foreign currencies has negatively affected the strength of the Kenyan shilling and driven up inflation levels in the country. There is no doubt a solution is needed to stabilize the currency. However, while there may be no one-size-fits-all solution, any measures taken must aim to increase and attract foreign direct investment into Kenya’s economy.

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Several concerns arise regarding the unintended consequences of Rabuor’s proposal that could discourage foreign investment and erode economic freedoms.

First, the bill contains legal complexities by using subjective terms like “reasonable needs” and leaves it to the proposed FCMA to interpret what constitutes improper foreign currency hoarding. The exact determination of what amounts to illegal speculation in foreign currencies would still be open for debate. It is also unclear from the initial draft of the bill whether it seeks to make it illegal for ordinary Kenyan citizens and residents to save their money in stable foreign currencies as a cushion against shilling depreciation and inflation.

The issue of economic freedom also arises. By restricting individuals’ abilities to hold U.S. dollars and other foreign currencies, the bill clearly infringes on their economic rights. Protecting personal wealth from currency devaluation is a legitimate reason many Kenyans give for holding dollars. Taking away that right without just cause is a clear infringement on economic liberties. The effect would likely be an increase in Kenyans holding offshore accounts and making overseas investments to evade tight currency controls. The bill, as written, could erode investor confidence in the Kenyan economy and cause other unintended consequences.

While governments may have valid reasons to closely monitor and regulate foreign currency holdings to combat illegal activities like money laundering and tax evasion, such oversight powers should be approached with extreme caution. Balancing the need for financial stability with economic freedom and investor confidence is a delicate task that requires thorough consideration of all potential drawbacks and unintended side effects.

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