Central Bank calls on Uhuru to fix shilling
It’s up to the Treasury to formulate policies to stabilise the shilling, Central Bank Governor Njuguna Ndung’u said on Tuesday.
As he faced MPs to answer questions about CBK’s efforts, the shilling slid to Sh107 to the dollar, its worst performance ever. (READ: Kenya shilling hits record low 107 vs dollar) The currency has now lost a third of its value.
Prof Ndung’u argued that CBK had done all it could within its mandate by increasing interest rates and the onus was now on the Treasury and other government agencies that deal with taxation to implement the necessary measures.
The governor, appearing before the Parliamentary Committee on Finance, warned that there were no quick fixes.
“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 the Treasury and other government bodies that deal with fiscal policies,” said Prof Ndung’u.
He argued that the responsibility of ensuring that there was adequate food and oil, among other essential commodities, lied with the government through the fiscal policy set by the Treasury.
“By raising the cost of borrowing, we will dampen demand for borrowing and slow down consumption (especially import-driven), which is putting pressure on the shilling,” Prof Ndung’u said.
Last week, CBK raised its lending rate by 400 basis points to 11 per cent in an effort to discourage borrowing from banks and cool demand, check inflation and stabilise the shilling. (READ: Loan pain as CBK raises interest rates)
However, the shilling continued to sink for the fourth day running, to the new record low.
“These measures cannot be felt on the ground immediately since they have to pass through the market. Banks are already reacting accordingly by increasing their lending rates,” Prof Ndung’u said.
The committee had summoned the Central Bank to explain what measures it was taking to rescue the shilling from falling and further hurting the economy.
Committee chairman Chris Okemo said solving the shilling crisis required joint action by players across all sectors of the economy, including the government, the private sector and CBK. Now the Okemo-led team wants to shift its focus to government bodies tasked with formulating fiscal policy.
“This is why we shall summon the Minister of Finance and the Treasury as early as next week to explain to this committee what they are doing on the supply side of the equation in order to come up with a wholesome solution to this problem,” Mr Okemo said.
Bypass commercial banks
Until now, the lowest the shilling had ever touched was on September 27, another Tuesday, when it traded at Sh104 against the dollar, forcing CBK to announce that it would bypass commercial banks to sell forex directly to crucial sectors of the economy.
This was not to be after a taskforce formed by Prime Minister Raila Odinga last week reversed the proposal, leaving importers to go back to commercial banks. (READ: Team to present recommendations on weak shilling)
This is what forex traders now say has caused anxiety in the market, triggering panic buying, and further increasing demand for the dollar that has in turn pushed the shilling to new lows.
At Sh107, the shilling has fallen 33 per cent this year, in what has earned it a spot among the worst performing currencies in the world.
On Monday, the shilling closed trading at Sh103.50/104.00. Though the currency crisis is running across Africa, CBK’s slow response has been cited as a key reason that has reduced confidence in the shilling.
The government has also scheduled a meeting this week with the International Monetary Fund to discuss the possibility of additional funding to the tune of up to Sh35 billion under the extended credit facility to shore up its forex reserves.
Kenya Association of Manufacturers is also warning it will pass on the additional costs associated with the weak shilling to consumers, a situation that could further complicate CBK efforts to stop inflation.
