CBK urged to save the shilling

March 17, 2011
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, NAIROBI, Kenya, Mar 17- As the shilling continues on a free-fall, calls are rising on the need for the Central Bank of Kenya to intervene and reverse the trend.

Standard Chartered Executive Director of Consumer Banking Kariuki Ngari fears that the weakening currency will reverse the gains that the country has made on the macroeconomic environment front.

The depreciating currency, he argued is likely to further fuel inflation and interest rates that the government has managed to stabilise in the last few years.

“It’s not a great thing to have the shilling depreciate mainly because we are an import economy. We import a lot more than we export so when the shilling depreciates more than it is depreciating; it hurts everybody and its consumer and its starts fuelling inflation. So there is definitely reason to say that we need to do something about the shilling,” said Mr Ngari.

According to data from the Central Bank of Kenya (CBK), the currency was on Thursday exchanging at an average of Sh85.81 against the dollar. This was a marginal gain compared to March 15 when it traded at an all time low of Sh86.45.

The shilling has been on the decline for most part of this quarter and many stakeholders believe that this warrants the Central Bank of Kenya’s intervention to reverse trend.

Many commercial banks agree that the currency is being pushed lower by speculation which tends to trigger panic reactions but the CBK believes that many market players are taking advantage of the situation to make extra cash.

Governor Prof Njuguna Ndung’u has constantly ruled out intervention to stabilise the currency arguing that if the Central Bank tried to protect the shilling, it would signal that the country was exposing itself to a speculative attack on its foreign reserves and that its market fundamentals are not solid.

The shilling has taken a beating from the political unrest in North Africa which besides leading to an increase in the demand for oil has raised the perception that Africa is a risky investment destination and has therefore led to the withdrawal of investors.

Further, the decline in the Nairobi Stock Index has put pressure on the shilling as investors have been selling off their stocks to convert to assets denominated in the US Dollar or other hard currencies.

“However, the shilling trading at about Sh85 against the US Dollar appears exaggerated and we should see a correction in the coming days. Apart from interbank trade, corporate entities are not trading at these levels. What bothers the CBK with this response is that we are not seeing massive outflows of foreign exchange, and in addition this is the wrong time to sell stocks in shillings and convert to US Dollars),” said the governor.

But even as this debate rages on, local firms continue to feel the pinch of the weak currency.

Kenya Tea Packers (KETEPA) said the currency was hurting their business and had led to a huge increase of their cost of inputs.  Only 10 percent of their sales are exports and this have not enabled them to balance out the high amount of money they spend to import packaging materials.

If this she state of affairs continues, it poses a double threat because consumer purchasing power will also be impacted which in turn will affect the firm’s sales and profitability.

Follow the author at https://twitter.com/cirunjoroge
 

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