Shilling hurtles towards Sh100 against dollar

September 22, 2011
Shares

, NAIROBI, Kenya, Sep 22 – The weakening Kenya shilling is swiftly approaching the Sh100 mark against the dollar as the Central Bank of Kenya (CBK) fast runs out of options to shore it up.

A source familiar with the workings of the Monetary Policy Committee says it is now too late to intervene as the government does not have the resources to defend the currency.

The local unit was in Thursday’s morning trade quoted at Sh98.14 to the dollar in what many analysts attributed to panic buying.

Some analysts have recommended that the CBK should consider pumping more dollars into the market to improve the liquidity levels but the source who did not wish to be named said this is not an option since the country’s forex reserves at September 9 stood at $3.90 billion.

“Intervention is not a solution right now.  The country’s reserves are currently equivalent to four months import cover so if CBK were to sell more dollars, then what will the country be left with?” he wondered.

His argument was reinforced by the zero effect that the injection of Sh15.3 billion worth of dollars into the market on Wednesday had.

Although he reckons that the shilling has been reacting to a strong dollar and the gloomy global markets, he says poor communication from the Central Bank and the mixed signals to the market are also to blame.

“The dollar is very strong and as you can see, the shilling is stable against for instance the Euro and the Pound. However, you cannot say you will do nothing. The market will definitely react to that,” he said in reference to the CBK’s insistence that it would not act to save the local unit.

CBK Governor Prof Njuguna Ndung’u has continued to maintain that the local currency fundamentals are strong and exuded confidence that the market will self-correct particularly when the uncertainties in the Euro zone are addressed and the volatility in the international market stabilises.

On this basis, the CBK has in the past three months announced what analysts term as a ‘half-hearted’ policy stance that have done little to give direction to the market.

Other signals such as its indecision on the Discount Overnight Window, which at one point was raised to eight percent, reversed to its original rate two weeks later and had a new formula announced a few days later have only served to further confuse the market.

Granted, there are a few market players that have taken advantage of the situation, but the soaring inflation and rising interest rates have only made matters worse.

The shilling has twice breached previously set psychological levels of Sh90 and Sh95 and analysts concur that soon, it will also break the Sh100 mark.

Recommendations that the Central Bank should take bold and drastic action such as raising the benchmark Central Bank Rate (CBR) by more than 200 basis points have largely fallen on deaf ears.

The result has been that the perception that the currency is on a ‘one-way’ risk has continued to be fuelled.

The free fall is also making a mockery of the MPC’s decision to hike the Central Bank Rate by a mere 75 basis in last week’s special meeting.

The gloomy picture is now being reflected in the Nairobi Stock Exchange which itself is witnessing a bear run that has seen foreign investors adopt a cautious approach.

Retail investors have largely stayed away from the market. The net effect has been a blow to the equities market.

Shares

Latest Articles

Stock Market

Most Viewed