MPs blame CBK and banks for shilling fall

A congruence of an incompetent Central Bank of Kenya and greedy commercial banks out to make a quick buck are to blame for the woes that befell the Kenyan shilling, making it the worst performing currency in world, MPs have said.

The legislators are sitting in an ad hoc Parliamentary select committee investigating the rapid decline in the value of the shilling.

“We know that there’s a big scandal and we’ll expose it,” the chairman of the committee, Mr Adan Keynan (Wajir West, MP) told Smart Company, noting that the slide of the currency was deliberate. He vowed that his team would unearth all that went awry.

The MPs said they believed that there is a mega-scandal in the works; that banks, with the blessing of the Central Bank, deliberately manipulated foreign exchange trading and that there are cartels tinkering around every industry of the economy to make a kill.

The shilling started to cede ground to the dollar in early May when it traded at Sh84 against the greenback.

The slide was gradual, but in July the trend gained pace, with the shilling hitting the Sh90 mark to the dollar by the middle of that month.

By September, the local currency was in a free fall and by mid-October, it took a swan dive, hitting Sh107.

This prompted President Kibaki to plead with the International Monetary Fund to fast-track loan approval.

The committee has met stakeholders in the monetary and fiscal policies sectors.

They include bankers, the Exports Promotion Council, the Central Bank’s Monetary Policy Committee, economists, consumers, a former governor, scholars, and other government officials.

The last of these meetings is slated to be with the country’s intelligence chief, Mr Michael Gichangi.

The National Security Intelligence Service, which has the mandate to identify threats against the security of Kenya, has as one of its key departments gathering intelligence on political, social, economic, and security issues. It is this intelligence that the Keynan-led committee wants to access to tie the loose ends of its investigation.

But bankers and economists believe that the ingredients were present in the market for the shilling to collapse. When they appeared before Mr Keynan’s team last week, they said the situation in Kenya was ripe for a rush on the currency.

First, Kenya’s import bill is double the income from exports. With such a scenario, Mr Paul Tikani, the chief operating officer at the KCB Bank Group, told MPs that it was only “natural” that Kenyans will need more dollars to foot the bill.

That meant increased demand for the dollar, and thus, according to the economics of supply and demand, the country has to pay more shillings to get the dollars.

Senior managers from Equity, Cooperative, Housing Finance, KCB, and Barclays banks said the matter of the depreciating shilling was not complex. They insisted that there was no foul play.

Arab world uprising

They blamed the eurozone crisis, trade imbalance, and the Arab uprisings for the woes. All these, they said, had a hand in the rising inflation blamed on high fuel prices, or because most investors in the developed market were out to make money from emerging economies, Kenya included.

They also said inflation rose out of food scarcity and perennial droughts. Banks, they argued, have no role to play when it came to food security.

The bankers shifted the blame to CBK, saying major weaknesses in the way it regulates currency trading left it vulnerable to racketeers to make huge profits through arbitrage — the practice of making money by exploiting price differences in the forex market.

“I put it to you that you distorted this exchange rate, you cornered the market, and you made super-normal profits…” said Mr Shakeel Shabbir, Kisumu Town East MP as he named banks that he called the “main culprits” in the debacle.

Mr Shabbir did so under parliamentary privilege. The point was later expunged from the Hansard, meaning that as far as Parliament is concerned, no names were mentioned.

That banks manipulated the playing field to make a kill is not far-fetched. It is something that the CBK governor, Prof Njuguna Ndung’u, has highlighted. He is said to have named the banks responsible when he appeared at a private session before the committee.

“We have information that six commercial banks were involved in speculative activity in the forex market during the two-month period,” said Mr Keynan.

Hands-off approach

As Kenya’s currency fell, the public got restless as the cost of living went up, politicians got worried, and the CBK governor came under pressure to review policies and prop the shilling. Instead, the CBK just looked on and adopted a hands-off approach, hoping that as weeks passed, the pressure would ease.

Last week, the shilling closed at May’s level of Sh83 to the dollar, which has prompted the MPs to question the reasons advanced by CBK as the cause for its fall.

The eurozone is still in turmoil, food shortage and high inflation persist, even in the Christmas and New Year holidays. The Arab uprising is still on, there are still murmurs about recession in the US, raising questions about the surging shilling.

The currency got back on its feet after the CBK took the controversial decision to raise interest rates to mop up excess money from the market. Could this be the reason for a stronger local currency?

Many experts who have spoken to the committee, including former CBK governor Micah Cheserem and economics scholar David Ndii, have argued that the CBK “waited too long” to act on the crisis.

Mr Cheserem criticised Prof Ndung’u for telling the market about the CBK’s intentions in the face of the crisis. He said the regulator should never tell the market whether it would interfere or not.

Mr Shabbir said CBK has had management problems, given that it did not have a deputy governor because the former office holder was ailing at the time of the crisis. Dr Harun Sirima was recently appointed to the position.

The MP claimed that the Monetary Policy Committee, which is supposed to hold weekly meetings, had not met for more than three weeks and that the CBK has had no management board. The CBK’s monetary policy has also been termed “inconsistent”.