Kenya: Central Bank Loses Grip on the Kenyan Shilling

22 September 2020

Before taking stock of the performance of demonetisation, Dr Patrick Njoroge stood outside a packed conference room.

Away from the glare of cameras, the Central Bank of Kenya (CBK) boss breathed deeply.

For that brief moment, he showed a rare side of himself, then quickly, as if resigned or resolute about the spectacle he was about to orchestrate.

Nothing has been more delicate for the former International Monetary Fund executive than holding the Kenyan shilling steady given how a small change of value affects every household in the country. From the cost of petroleum to the cost of imports.

A few months into office, Dr Njoroge clamped down on currency dealers from commenting about the currency. He then went after analysts who spoke to the media and reigned in international media that extensively reported about the currency.

And for several years, he was able to keep the currency steady despite growing concerns that Kenya had quietly moved into currency control regime.

But the bubble appears to be bursting as the CBK struggles to keep the currency from losing ground against the dollar. Bank executives, who only agreed to speak on condition of anonymity, said the CBK has adopted strong arm tactics against the undeniable forces of demand and supply, a ticking time bomb that will either implode or transform into a dollar black market -- if it has not already done so.

"Right now we are at 108.50 on the interbank. If they opened and allow everyone to do what you have to do, it will run to 112 because of panic," said a banking executive.

'Acceptable mark'

A spot check by the Nation in at least 10 commercial banks Tuesday revealed that banks have crossed the Sh113 mark for every dollar sold and are headed towards Sh115, but are not reporting the same, to keep it at the 'acceptable mark of Sh108.' None of the commercial banks was willing to sell the dollar Tuesday at less than Sh111 on average.

Kenya imports three times more than its export. The country has also accumulated enormous foreign debt which is repaid by buying dollars.

Covid-19 has made things worse by cutting exports drastically and disrupting tourism.

There has also been less portfolio investments from hedge funds that invest in the bonds or stocks market.

Treasury CS Ukur Yatani said last month that things could have been much worse without new dollar loans. For transparency Kenyan currency traders exchanging a minimum of Sh250,000 per transaction have a Reuters page where they post prices. Once you post a price you cannot renege, but now if you see demand you can post a higher bid to take advantage.

But here is where regulatory overreach is coming in. According to multiple sources, if you put in a higher bid, CBK officials call the bankers and at times summon them to Haile Selassie Avenue for a dressing down.

"When the CBK looks at that page and sees people speculating, the director of financial markets calls traders, bankers, CEOs, and it's just ugly," said a source.

Artificial shortage

But since you cannot post a high price on the platform, you can't sell expensively to other banks because you will be summoned for distorting prices. Hence you stop selling publicly to other banks, creating an artificial shortage that drives prices even higher.

"You find that because you have relationships with these clients, if someone wants $5 million, you have to stagger it. You tell him you do not have $5 million, 'you take this $500,000. If I get some more I will give you', which is creating more inefficiency in the market because the demand continues to pile up," a source said.

IMF, which in 2018 claimed the shilling was being managed, has asked Kenya to allow the shilling to depreciate.

"CBK should also continue to allow the exchange rate to act as a shock absorber," said Tao Zhang, deputy managing director and acting chair.

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