Stabilising the shilling in word and deed

Central Bank governor Njuguna Ndung’u has been hard pressed in the past six months to stop the depreciation of the shilling.

This saw the CBK come up with several measures to halt the free fall of the local currency, from suspending electronic forex trading to threatening to name and shame commercial banks suspected of hoarding foreign currency.

The CBK also shocked the market when it increased the Central Bank Rate — the rate at which CBK, as the lender of last resort, loans commercial banks — by a whooping 400 basis points to 11 per cent, the highest in history.

But the shilling defied all the measures the economic professor announced to stabilise it.

The CBK would even have bypassed commercial banks to physically sell foreign currency directly to importers had it not been stopped by a technical team convened by Prime Minister Raila Odinga to devise ways of stopping the decline.

Despite all these measures, the shilling raced past the 100 mark to touch the Sh107 mark against the dollar, causing investors sleepless nights.

But, last week, the shilling made an unprecedented about-turn, gaining more than 8 per cent to close the week trading at Sh99 against the dollar, less than 24 hours after Finance minister Uhuru Kenyatta emerged from a high-level meeting attended by players in the banking industry.

In a carefully crafted statement, Mr Kenyatta, who “strongly” supported CBK’s interventions, announced that the government would ensure that all genuine demand for foreign exchange would be met.

If this was all the government needed to do to stabilise the shilling, why did it wait so long, or what magic did Mr Kenyatta conjure?

Smart Company can now report that bad blood between the CBK and commercial banks was the main reason the shilling defied all the measures put in place to stabilise it.

A source who attended the meeting says most of the time was spent on mending the sour relationship between the regulator and commercial banks, instead of devising ways of fixing the shilling.

“When we entered the meeting, Mr Kenyatta told us that we would not leave until we found a way of tackling the bad blood between commercial banks and the governor. We were to simply find a solution to fix the shilling,” said the source who asked not to be named because of the sensitivity of the matter.

Though it was true that the Kenyan shilling was under attack from international factors just like other African currencies, commercial banks were against the CBK position of “talking at them”.

The meeting was attended by the Kenya Bankers Association, chief executives of the big banks, and Treasury officials.

“Commercial banks were particularly angered by the fact that the CBK was threatening to name them as part of the problem, yet he knew very well that they were just in business. They did not take it kindly that he even wanted to bypass them to sell the currency directly to the market,” the source added.

“Simply put, the governor was made to understand that he cannot police banks but rather seek their suggestions in handling the crisis,” said the source.

Prof Ndung’u has more than once accused commercial banks of hoarding foreign exchange to create shortages and maximise their profits.

He was hoping the move to sell dollars directly to importers would unlock the supply constraints and ease pressure on the shilling.

But this was not the only meeting held on the shilling that week. Treasury, which took up the role of bringing banks and their regulator to talking terms, had organised individual separate meetings with chief executive officers of commercial banks.

It is no wonder the meeting resolved that the CBK revives the forex dealers’ forum.

“We also welcome the CBK action to revive the forex dealers’ forum that will allow commercial banks’ treasurers to freely interact with the CBK to ensure that large foreign exchange transactions are met in an orderly manner,” said Mr Kenyatta.

It also emerged that the proposal to reduce from 20 per cent to 10 per cent the amount of foreign currencies that commercial banks can hold had already been rejected by the CBK as a way of increasing dollars into the market.

“Treasury had proposed to the CBK that it halves the foreign exchange exposure limit to reduce the ability of banks to hoard dollars months ago when it was clear that the shilling was facing its greatest risk.

But the governor rejected the proposal, saying the market would stabilise itself,” said the source.

The meeting also agreed that the key players should be targeting the Sh92 mark against the dollar before the end of the week.

Though these measures have been taken positively by the market so far, it remains to be seen if the new-found love will last and help the shilling recover fully.

Traders say the assurance that forex demands will be met by the government has dissipated panic that triggered frenzied buying, causing unnecessary demand.

“There has been reduced demand of about 8 per cent from the corporate sector, and that has been significant in lowering the demand. We expect the shilling to fall to below Sh95 to the dollar before the end of the year,” said Mr Dickson Magecha, a forex trader at Standard Chartered Bank.

Mr Kenyatta also said the government had started talks with the International Monetary Fund for additional loans. An increase in the flow of dollars would restore confidence in the shilling.

Treasury also announced that it was reviewing government spending in an effort to reduce the need for additional borrowing.

CBK said it would tighten the shilling’s liquidity further. This saw it mop up excess money from the market for a third straight day on Monday through repurchase agreements.

But despite these measures, which came a bit late, consumers will continue paying a high price for the weak shilling after the cost of energy went up last week.

Banks are also facing their worst times as the high lending rates will discourage borrowing while increasing the risk of default.