CBK must take action to shore up shilling

September 23, 2011
Shares

, NAIROBI, Kenya, Sep 23 – The unprecedented weakening of the Kenyan shilling will only be reversed if the Central Bank of Kenya (CBK) takes bold and drastic action that signals its desire to defend the local currency, an analyst has said.

Genghis Capital Research and Investment Analyst Evans Kamau argued that the rate at which the local unit was deteriorating is alarming and only government controls can save the situation.

“One way to do that is to maybe limit the number of days that you can sell currency forward. That reduces the exposure for banks in terms of the limits,” he proposed.

Another suggestion would be to introduce tax on foreign exchange transactions such as on revenues or profits.

If such a tax was introduced, it would be similar to the ‘Tobin tax’ that is used in many developed countries where a certain levy is charged on every foreign exchange deal and reduces the profit margins for traders.

Kamau told Capital Business that the other option available to the Central Bank was further hiking interest rates to lure more foreign investors who could be fleeing the debt crises in Europe and United States of America.

These interventions should however not be limited to the money markets but the government has to devise a plan that would enable it to address the country’s dwindling trade balances.

It would also help if it improved the competitiveness of its products and produce, as well as entering into favourable trading arrangements.

“Certainly Central Bank has to sit down with the Treasury and chart the way forward in as far as government borrowing is concerned; in terms of reducing the amount of budget deficit and they also need to figure out how to fix the balance of payment scenario,” he emphasised.

The government might get some reprieve if the anticipated short rains in October are adequate since it might reduce the amount of imports needed while food availability would ease the current inflationary pressures.

The plummeting shilling has thrice forced the CBK to directly intervene by pumping more dollars into the market.  However, this move has had very little impact on the currency with Kamau arguing that it should try and sell a substantial amount of forex reserves, say $250 million to stabilise the price.

Although he acknowledged that this was a short term measure, he reckoned it would work best if it was concurrently done with Tanzania’s and Uganda’s central banks.

“Possibly the best thing to do is to involve the Bank of Uganda and the Bank of Tanzania as part of the selling so they might bring stability to the Kenyan shilling and that would spread to their currencies as well,” he argued.

At 5pm on Friday, the local currency was trading at 98.54 against the US dollar, having opened the day at Sh99.55. It is projected to hit the 100 shilling level against the greenback by next week, a fall that is also been blamed on speculation.

But even as the shilling continues on a downward spiral, Kamau discounted diversification into other currencies as a measure to cushion the local currency from such future shocks.

The analysts explained that while such a measure would work in the short term; it is not a long term intervention.

“If all the markets that we trade with said ‘we are not accepting dollars and we would prefer that you pay us in (Chinese) Yuan,’ maybe then diversification would be considered prudent,” he argued.

In addition, taking drastic measures such as dollarisation which refers to the adoption of the US dollar as a currency of choice would be unnecessary, he added.

This was because even though the plunge is big, the country is not in the red, yet.

“This is just a bleep on the radar and these things happen. In exchange rates, there is an element of risk aversion. There was a time when the dollar against the Kenyan shilling was very weak. What we are seeing now is the other side of the curve but over a period of time, the shilling will go back to the mean,” he enthused.

His projection that CBK Governor Prof Njuguna Ndung’u would be forced to take a hard stance if the shilling continued sailing in uncharted territory was however disproved when in a statement sent to newsroom on Friday, the CBK once again ruled out any intervention.

“The current monetary policy stance will continue with consequential effects on inflation, interest rates and exchange rates,” the statement read.

“The Central Bank remains committed to a market determined exchange rate for as long as it is supported by fundamentals,” the governor went on.

However he did for the first time acknowledge that the country’s dwindling trade balances is one of the factors that are contributing to the depreciating shilling.

Together with development partners, Prof Ndung’u disclosed that CBK is working to reduce the balance of payments gap.

Shares

Latest Articles

Stock Market

Most Viewed