CBK asked to devalue currency
The foreign exchange interbank market has been dysfunctional during this time.
www.the-star.co.ke
I have spent over 24 years of my professional life dealing with foreign exchange in Kenya, Dubai and Singapore.
The current FX issues in Kenya have been going on for nearly two years.
The foreign exchange interbank market has been dysfunctional during this time.
In such an environment the only source of dollars for commercial banks is via either exporters selling to them or the Central Bank of Kenya(CBK) selling their foreign exchange reserves to them.
However, CBK is fixated with the KES1 screen price and doesn’t allow commercial banks to buy dollars from exporters at rates above the official screen price which is currently around 116.
However, banks can sell dollars to importers at whatever level they like, which is currently between 122-123.
Hence, why would an exporter agree to sell dollars to a commercial bank at levels of 115-116 when they know importers are buying above 122. Thus, they will rightly hoard their dollars.
Think of it differently from a perspective of a foreign portfolio investor who would want to buy a stock or bond in Kenya. Why would he want to invest in Kenya if he brings his money in at 115/116 and straight away loses money because he can only exit the market at 122/123.
This is why it’s not surprising that foreign investors didn’t invest in this week’s infrastructure bond and also why Safaricom's share price is tanking.
Make no mistake, the current rise in Eurobond yields is also partially driven by negative sentiment on the dollar shortage situation in addition to debt restructuring concerns.
With regards to why the Central Bank is not selling dollars into the market, it either has to do with the governments upcoming bloated dollar debt repayments or IMF restrictions under their current ECF program or both.
But more importantly, the issue now in the FX market seems to have moved away from a pricing and liquidity issue, to a crisis of confidence. Hence, no amount of Central Bank intervention will work at this stage as most of the market will eagerly be awaiting to buy all these dollars as soon as they reach the market.
The only solution right now is to devalue the currency to a level that would make it compelling for exporters that are hoarding to sell their dollars into the market.
This could start with unifying the two exchange rates in the market. However, even if this devaluation to unify these two FX rates takes place, the Central Bank should prioritize improving the functionality of the FX interbank market.
Otherwise it’ll just be a dog trying to chase his own tail. It’s broadly clear that the FX interbank market has broken down due to the central banks ‘heavy hand’ on the shilling and intimidation of commercial banks.
If something doesn’t change quickly, Kenya is heading the Nigeria route and private investment will be withdrawn.
Already, we are seeing companies such as Kapa and Pwani Oil shut down, but many others will follow suit if this issue is not tackled head on.
Companies that rely on imports of raw materials have defaulted to their international suppliers while others have already begun Dollarization of their receivables. This is how private enterprise dies.
We’ve seen it in Zimbabwe and Ethiopia. Sadly, the recent press conference from the CBK was an abomination to say the least.
The Central Bank Governor's failure to answer journalists questions on the Dollar shortage matter was shocking. Indeed, a Central Bank's main aim is to manage expectations of the public by developing robust credibility.
This is largely achieved by communicating with the public and being transparent.
The Governor let himself and the Central Bank down last week by being evasive on a matter that is impacting the livelihoods of so many Kenyans.
It’s also shocking that nobody from the Executive has intervened in the matter despite the vocal calling out from the private sector lobbies such as KAM and KEPSA.
Clearly they’re too busy with the upcoming elections in August.
However, if the dollar shortage issue is not urgently addressed, there will be no economy for the new President to manage in a few months time.
Amefanya kazi!!!
I can even guess what loud mouth govt apologist here are going to say!
-Who is this expert
-Why are they hiding anonymously
-Why should we trust the opinion of a an anonymous/unknown person over that of govt experts
-That’s just their opinion
-Kenya economy is very robust and important therefore cannot be allowed to fail
-etc etc!!!!
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