alexa Why minister has sent the right signals to financial markets - Daily Nation

Why minister has sent the right signals to financial markets

Thursday October 13 2011



Deputy Prime Minister and Minister for Finance, emerged on Thursday after a three hour meeting with commercial banks chief executives and the Central Bank of Kenya top management, to announce what is so far the strongest pitch for the restoration of calm in the financial markets.

Mr Kenyatta’s statement reflected a common approach by the main players to restore the stability of the Shilling.

In the statement, the government did not condemn the commercial banks for engaging in speculation.

Instead, the minister’s statement attributed the current situation to supply and demand forces and the upsurge in a genuine demand for dollars.

Perhaps the most significant measure was the lowering of foreign exchange exposure by commercial banks from 20 per cent to 10 per cent.

This is an acceptable way of limiting speculations by commercial banks.

With the foreign exchange exposure by commercial banks controlled, the Central Bank of Kenya will now be watching an attack on the shilling by external forces.

Another significant move is the commitment by the CBK to meet ‘any genuine foreign demand for foreign exchange through the interbank Indirectly, the minister was saying that the recent threat by the CBK to sell dollars to selected sectors was wrong. The Central Bank will be injecting dollars whenever there are shortages.

But this will be done transparently through the interbank. Mr Kenyatta’s pledge for the revival of the Forex Dealer’s forum was also significant.

As the shilling continued to take a beating, relations between the Central Bank and this group appeared to be worsening.

The country was at a point when treasurers and dealers did not want to be quoted for fear of the regulators.

Mr Kenyatta’s statement sent the signal to dealers and treasurers that he recognised then as important players in the battle to restore stability in the marketplace.

Whether the minister’s statement will immediately restore calm in the markets remains to be seen.

Chances are that any major recovery of the shilling will come after conclusion of the meeting with the IMF.