Uhuru unveils dollar rule to rescue Kenya shilling

Treasury on Thursday moved to calm the financial markets and shore up the shilling, which has depreciated rapidly this year.

Finance Minister Uhuru Kenyatta announced that the government was immediately entering into talks with the International Monetary Fund for additional loans. An increase in the flow of dollars from that direction would restore confidence in the shilling.

In Parliament, Mr Kenyatta was barred from transacting any business until he reports to the House on the performance of the shilling. (READ: Uhuru barred from Parliament over shilling)

Speaking after a meeting with the Central Bank of Kenya and the Kenya Banker’s Association, Mr Kenyatta also said Treasury had cut by half the amount of foreign currencies a bank can hold without the funds being a deposit by a customer, thus reducing banks’ ability to hoard dollars.

Banks will now be required to have a foreign exposure limit of 10 per cent down from 20 per cent of their core capital. This has an immediate effect of releasing dollars into the market.

“We are confident that the current pressures on prices and the exchange rate will subside in line with the measures we are taking,” Mr Kenyatta said.

After the announcement, the shilling firmed slightly to 102.00/20 against the dollar from the 102.80/103.00 level it was quoted at before the announcement. 

Review government spending

Treasury will also be reviewing government spending with a view to cutting it.

This will reduce the need for additional government borrowing, forcing banks to lend to the private sector. However, the move may hurt the poor as subsidies and other social benefits are the likely casualties.

Mr Kenyatta said his ministry will review the CBK Act “with a view to enhance effectiveness of monetary policy” and asked CBK to enhance its capacity in monetary policy operations.

Commercial banks had pointed at weak monetary policy formulation and mixed signals by CBK as some of the reasons for the shilling’s depreciation.

And in apparent response to CBK’s position that it was up to Treasury to save the shilling, Mr Kenyatta said there was nothing wrong with the economy to warrant his intervention. (READ: Central Bank calls on Uhuru to fix shilling)

On Tuesday, the Central Bank had urged Treasury to implement proper fiscal policy by ensuring importing of food and fuel were well planned and borrowing was manageable.

“There are two forces pulling the shilling; the supply and demand forces. We have done our part in managing the demand side by raising the cost of borrowing.

“The remaining part is for Treasury and other government bodies that deal with fiscal policies,” CBK governor Njuguna Ndung’u had said.

However, Mr Kenyatta attributed the current crisis to a “communication breakdown” between CBK and commercial banks.

“The current weakening of the shilling is not driven by changes in our own economy. Our economy remains sound and therefore there is no need to panic,” he said, and called for closer consultations between Central Bank and commercial banks.

To avert a repeat, CBK was directed to set up a Forex Dealers’ Forum “to allow commercial banks’ treasurers (Forex Dealers) to freely interact with CBK to ensure that large foreign exchange transactions are met in an orderly manner”.

Kenya Bankers’ Association chairman Richard Etemesi welcomed the move, saying, there was a need for the three — the Treasury, Central Bank and the association — to work together to end the crisis.

Hoarding and speculating

Mr Kenyatta also faulted earlier positions by Central Bank that commercial banks were to blame for hoarding and speculating on the dollar, saying, the depreciation of the shilling was caused by other factors, including “increased genuine demand for foreign exchange to meet imports for production and consumption”.

The minister added that banks amassed dollars in their accounts largely due to uncertainty in the forex market.