Shilling slithers towards 100 to dollar

August 9, 2011 2:57 pm

, NAIROBI, Kenya Aug 9 – In a dreary day at the forex market on Tuesday, the shilling continued its downward spiral against the dollar finally hitting the Sh95 mark.

The currency opened trading at Sh93.30, but continued to lose ground to the greenback and closed the day at Sh94.80/95, the lowest in the shilling’s history.

Forex traders at Commercial Bank of Africa said the shilling’s tumble into uncharted territory was driven by panic buying mainly from importers who feared further weakening.

“There are jitters in the market and this has seen importers flooding the market. Traders are also not taking firm positions in dollar buying (and) that has further led to the drop,” Duncan Kinuthia of CBA’s Treasury said.

Mr Kinuthia said most traders were however waiting for direction from the Central Bank on the current situation.

His sentiments were echoed by Aly-Khan Satchu of Rich Management who said the lack of leadership from the Central Bank of Kenya (CBK) was hurting the shilling.

“The shilling has Sh100 written all over it,” he said.

The Central Bank has been under immense pressure to correct the weakening shilling. Its decision to hold its benchmark lending rate at 6.25 percent has however raffled many feathers, with some analysts suggesting the bank was not doing enough.

“The MPC (Monetary Policy Committee) has been getting it wrong all year. It is not committed to raising interest rates even when market indicators suggest that is what is needed to correct the situation,” Mr Satchu said.

Kwame Owino from the Institute of Economic Affairs however said there was no short-term solution to the problem until the CBK was able to firmly rein in inflation.

Inflation in July shot up to 15.53 percent from 14.49 percent recorded in June, with many analysts predicting it could hit 20 percent by the end of the year.

Mr Owino said effects of inflation could not be solved immediately as supply constraints further frustrate efforts to tame runaway inflation. He is of the opinion that taking out the upshot of inflation, the real value of the shilling against the dollar was not too bad.

“The real value of the shilling barring inflation is not as bad as what we may think. We are in a difficult situation but we should not be quick to equate this to the economy performing badly,” Mr Owino said.

On Monday, CBK Governor Prof Njuguna Ndung’u indicated that the bank was considering limiting the amount held by banks in forex reserves in an effort of strengthening the shilling. This could however act as a double-edged sword with some traders predicting could increase the shilling’s volatility, as the market would be liquid.


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