House team places blame for slide of shilling on CBK

Parliament’s Budget Office has blamed the Central Bank of Kenya for the rapid depreciation of the shilling.

In its latest policy brief the office, which advises the House on fiscal policies, said the Central Bank had been slow to act to stem the depreciation and was sending “mixed signals” on the way to manage the crisis.

“This may have caused investors to lose confidence in the country’s management of the currency crisis and view Kenya as a risky destination.

“Possibly, the mixed signals are also fuelling speculation causing the hoarding of dollars,” noted the policy brief, issued this week.

The Budget Office also insists that the policies in place to prevent the shilling from sliding further are ineffective. (READ: CBK boss summoned over weak shilling)

The mandarins at Parliament are of the view that because the CBK, through the Monetary Policy Committee, reviews and fixes the Central Bank Rate, it had the power to control the amount of money in circulation and commercial bank deposits held in its coffers “by exchanging treasury bonds in the open market”.

“It is a considered opinion that the CBK targets to control either the interest rate or the money base; and not both as is the case at present, which is probably confusing the market, hence the free fall of the shilling,” they said.

The brief noted that activity at the Nairobi Stock Exchange had gone down and bonds had suddenly become more lucrative.

The Parliament team also noted that the last time the shilling traded at Sh100 to the dollar, was in March 1994, when the multi-billion Goldenberg scandal was being executed.

This time, however, the shilling’s depreciation comes against a backdrop of high inflation. Prices of maize flour and oil have soared while a shortage of sugar has hit the market.

The House team also poured cold water on optimism that greeted the assent of the Price Control (Essential Goods) Act, saying it was dangerous because it had opened doors for artificial shortages.

“Price controls will not necessarily help the consumer. When prices are controlled, producers either shift to other markets where they will get a higher profit or stop production altogether if they are not making profits.

“The effect is acute shortages and a thriving black market,” the Budget Office noted.

The office also noted the “possibility” that prices of mainly food and matatu fare are controlled by “cartel-like behaviour”.

They said unless the government invested heavily in mass transport, food (maize flour, sugar, rice, and cooking oil), it cannot effectively control food prices.

In addition, mass transport may reduce the number of cars on the road and push down fuel consumption.

Investment in the strategic reserves for oil and maize will also cushion the country from sudden supply shocks in the local and international markets.

The Budget Office also wants the CBK to buffer its foreign reserves, currently standing at just three-and-a-half months of import cover instead of four months.

It prescribes that the CBK talks to the International Monetary Fund to intervene and help the country handle the crisis.