13 January 2013

Kenya: Shilling On Free Fall

Nairobi — The Kenyan currency has maintained a downward slide against major world currencies prompting fears that the events of last year that saw it hit an all-time low could recur. The shilling has currently slipped to a seven month low.

The shilling defied a bullish stock market run to slide from an initial 85 against the US Dollar to 86.45 by close of business Wednesday last week. This reflected a fall of over 0.5 per cent. Analysts have predicted tumultuous times for the Kenyan currency aided by increased imports of oil and machinery coupled with inflationary pressures occasioned by electioneering spend.

A planned Central Bank of Kenya (CBK) Monetary Policy Committee meeting has attracted a lot of attention as industry pundits closely observe what measures it will take to tame a further slide.

Last year, the CBK came under intense pressure amid accusations that it had colluded with wayward forex operators to cause an artificial weakening of the shilling, a situation that saw some smart trader's cash in heavily at the expense of the public. It occasioned a runaway inflation process that saw basic commodity prices rise to levels never witnessed before.

Most analysts predict that the Monetary Policy Committee has leeway to cut the central bank rate in light of drastically reduced inflation. In December, month to month inflation fell to an all-time low of 3.20 per cent.

Kenya's inflation levels will be among the most closely followed given that the country is headed for a make or break general election in less than two months.

Analysts have initially accused the CBK of being over protective of the local currency through mopping up of liquidity in the local market to support the shilling. Most are of the opinion that the CBK should leave the shilling to fall freely and adapt to the existing market dynamics.

According to the Aly Khan Satchu a financial analyst with Rich.com, the government should leave the shilling to operate independently within market forces and find its true value.

With the failure of parliament to pass the law regulating campaign financing and provided for in the constitution, the shilling could be headed for more turbulent times politician pour cash to pacify the public in exchange for votes. Election times in Kenya have often seen a sharp rise in commodity prices and a free falling local currency.

Matters are not helped by the fact that most companies, mostly multinationals will withhold their dollar spending until after the elections. The events of the 2007 bungled presidential elections are still fresh in the minds of the business community in Kenya.

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