Uhuru comes to the aid of ailing shilling

October 13, 2011
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, NAIROBI, Kenya, Oct 13 – The Central Bank of Kenya (CBK) has reduced by half the minimum limit of foreign exchange held by banks to 10 percent.

The foreign exchange exposure limit, which is computed as a ratio of the bank’s core capital will provide an incentive for banks to release the amount of foreign currencies in their possession.

Finance Minister Uhuru Kenyatta who made the announcement on Thursday said by lowering the rate from 20 percent, they hope to reduce the demand for forex and thus stem inflation and the exchange rate spikes.

“I am personally confident that this action will encourage banks to realign their portfolios, stem capital outflows and boost foreign exchange reserves thereby restoring stability in prices and the shilling exchange rate in the immediate term,” the minister remarked.

The announcement seemed to boost the shilling which prior to it was exchanging at Sh103. 95 to the dollar but strengthened an hour later to Sh101.15 against the greenback.

At a press conference, Kenyatta expressed Treasury’s support for the measures taken by Central Bank to tighten the monetary policy including the four percent hike in the base lending rate to 11 percent.

There has been speculation that the Treasury, which is CBK’s parent ministry, had abandoned the regulator which has come under fire from market players, analysts and the general public over its failure to intervene in time and save the shaky currency.

However, Kenyatta’s statement seemed to reaffirm their confidence in the measures taken by CBK despite the fact that they have been insufficient in stabilising the local unit.

“We support the CBK’s stance to tighten liquidity by raising the policy rate by 400 basis points to 11 percent. We also support the CBK’s actions in the money market to tighten credit conditions as well as their readiness to take further actions including increasing the cash (reserve) ratio requirement if necessary,” the minister who was flanked by some members of the Kenya Bankers Association added.

And in a bid to demonstrate that there was no ‘bad-blood’ between the government and the banking sector, Kenyatta reiterated the government’s commitment to work closely with banks to determine the measures that can be taken regularly to calm the market and restore confidence.

The two parties have been trading ‘veiled’ blame with each absolving itself, even as the currency continued to plummet to historic lows of Sh107 to the dollar.

However, there is general consensus that the deteriorating shilling was not due to economic fundamentals, which the government maintains are strong, but ‘genuine’ increase in foreign exchange demand to purchase imports.

Currency speculation has also been a factor prompting a section of players to urge the government to step in and take control of the foreign exchange market.

Kenyatta was however categorical that the government has no intentions of introducing the controls in the interbank system which he maintained would continue to be determined by demand and supply forces.

Nevertheless, the government is committed to restoring certainty in the market and is for instance undertaking a review of the CBK Act to enhance its ability to formulate effective policies.

This would go hand in glove with other measures such as the coordinated approach that has been adopted by the East African Community Central Banks to tame the soaring inflation and volatile currencies.

Central Bank Governor Prof Njuguna Ndung’u was alive to the fact market stability and predictability this can only be achieved in concert with the market partners who will henceforth be involved in all decisions that they take.

KBA welcomed this move with Chairman Richard Etemesi downplaying the perceived rift between bankers and the regulator.

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