CBK blames high State spending and speculators for Kenya shilling’s woes

Dr Patrick Njoroge, CBK Governor during the press briefing at his office in Nairobi. [PHOTO: PIUS CHERUIYOT/STANDARD]

NAIROBI: Central Bank of Kenya Governor Patrick Njoroge has hit out at speculators and the unco-ordinated spending of the Treasury for the volatility of the shilling.

Heavy budgetary expenditure on big infrastructure projects such as the multi-billion standard gauge railway, he reckons, has strained the shilling, diluting any steps taken by the CBK to stem any further weakening.

“It’s like we have one arm firmly on the brakes and the other firmly on the accelerator,” explained Prof Njoroge in his first public interview yesterday.

It was the first time that the CBK boss linked contradicting monetary and fiscal measures to the depreciation of the shilling.

Njoroge also criticised aggressive speculative tendencies among market intermediaries including commercial banks and currency traders for partly fueling the shilling volatility in the market. The twin problem, he said, is the main reason that played out to strain the shilling’s exchange rate against the dollar.

He was, howerver, quick pointed out that these issues have been addressed and expects stability in the market going forward.

Treasury has lately been on the spot for running an expansionary budget through heavy investment in infrastructure projects, which draw significant material inputs from imports.

The US dollar is the principal currency in international trade, and is therefore the unit in which such imports are paid. CBK has been involved in tightening money supply in the financial market through higher interest rates as it seeks to stop depreciation of the shilling.

BENCHMARK RATE

Since Njoroge assumed the job in June, the benchmark rate, which acts as a signal to commercial banks, has been raised by 300 basis points, hence pushing up the cost of borrowing in the market.

Njoroge said there was need for ‘even greater co-ordination’ between his agency and the Treasury. The governor cited the need to strengthen the country’s fiscal position and said that he was working with the Treasury on this issue but did not give details.

The shilling has weakened about 16.5 percent against the dollar this year, but Njoroge said the central bank did not have a target for the shilling exchange rate and was committed to a flexible exchange rate.

He added that he would be working more closely with Henry Rotich, Treasury Cabinet secretary, to strengthen the fiscal position in the longer term to tackle volatility of the local currency.

The local unit has been trading at record low levels against the US dollar, ending yesterday at Sh105.27.

The difference in approaches of the Government and the CBK, whose main role is to ensure stability of prices, is only one of the reasons for the depreciation of the shilling.

Njoroge said speculation had also significantly worsened currency volatility in the last few months. However, in several instances, the CBK boss said, big swings in the forex markets were driven by expectations of a surge in demand, rather than by market forces.

A meeting with banking chief executives was called earlier in the month where the CBK warned against speculative trading.

Analysts in the forex market have since been warned about giving ‘arbitrary’ forecasts on their expectations.

Njoroge termed such forecasts as ‘self-fulfilling prophecies’ and that his office would start demanding that any predictions on the forex market must be backed by data.

“We have talked to the players and would want to engage them on any forecasts they make, and they must be backed by numbers,” he said. Even with freedom of expression, it was indisciplined to shout fire when there is no fire, Njoroge said in reference to the perceived speculation in the forex markets.

He also gave reassurances that the forex reserve at the CBK was adequate. He quashed any fears about diminishing forex reserves, saying the country was well covered with $6.1 billion in its own funds, and $610 million in the IMF facility.