19 October 2008
Nairobi — What is the matter with the Kenya shilling? With the economy having a healthy current account and plenty of dollars in the commercial banking system, one would expect a stable shilling.
According to the latest figures, the Central Bank of Kenya is currently holding $3 billion, representing four months of import cover.
And the stock of foreign exchange held by commercial banks by last week was at its usual average of $15 billion showing no signs of stress.
The fundamentals are strong indeed. Yet the shilling has been experiencing extreme volatility, weakening to a level where the economy is now unlikely to enjoy the benefit the prevailing low international oil prices. Last week, the shilling depreciated against the dollar, touching a new low of Ksh77 against the greenback.
Since the beginning of the year, the currency has lost 14 per cent of its value against the greenback -- precipitating a windfall for earners of dollar-denominated salaries but introducing new inflationary pressure in the macro economy.
Clearly, speculative pressures by dealers are at play. Taking advantage of the uncertainties of the turmoil in international markets -- and the self-serving predictions that remittances from the Kenya Diaspora are likely to dry up due to turmoil in international financial markets, currency dealers would appear to be prepared to buy high to justify their doomsday predictions.
In contrast, traders with surplus dollars are hoarding the greenback in line with their predictions of looming shortages in dollar inflows.
Is the Central Bank of Kenya likely to intervene in the market? All indications are that this is unlikely. Opinion within the management of the Central Bank is that there is no need for panic.
The indications are that the Central Bank of Kenya will only intervene the moment it sense palpable changes and pressure on the current account or when statistics show clearly that the volume of foreign exchange reserves held by the commercial banks are beginning to dwindle.
Indeed,--as we went to press, Finance Minister John Michuki and Central Bank Governor Prof Njuguna Ndungu were preparing to put out a statement to calm markets and to remind players that the fundamentals had not changed.
Whether their caution will make an impact on a currency dealing community wallowing in the doomsday mood remains to be seen.
But a major turning point will be the time when the government will go to the market to make the large purchases of maize and fertiliser that it has planned.
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