NAIROBI: Central Bank Governor Patrick Njoroge has had a turbulent two months since he assumed his corner office on Nairobi’s Haile Selassie Avenue, with the local currency defying attempts to stop it losing ground against the dollar.
Since the beginning of July, the Central Bank of Kenya (CBK) has mopped up Sh284 billion in excess liquidity from the markets, setting the stage for a major liquidity crunch.
The regulator has also raised lending rates twice since June, which has seen credit charges go up 300 basis points to 11.50 per cent.
It has also sold an undisclosed amount of dollars in the market at various times to stop the slide of the shilling, as well as set a minimum amount that banks can transact on the interbank market at $500,000 (Sh51 million).
“Following consultations between the Central Bank and the financial markets professionals association (ACI), it was agreed that in order to promote efficiency and transparency in the interbank market, the minimum price for interbank trade be raised to $500,000. Accordingly, the Central Bank raised this limit from July 23, 2015,” the bank said in an email interview.
So far this month, up until last week Friday, CBK has mopped up Sh129 billion in excess liquidity from the market through term auction deposits and repurchase agreements. This makes it more expensive for traders and banks to hold dollars, lending support to the shilling.
The bank is hoping that the tight liquidity will also reduce the amount of money in the market chasing after the goods available to help limit a rise in the cost of living.
Dr Njoroge’s team has opted for direct market operations, mopping up on average of Sh5 billion every day from the market in excess liquidity.
VOLATILE CURRENCY
Reuters data shows CBK mopped up a total of Sh155 billion in July, but this amount looks set to be surpassed this month if the trend witnessed in the last two weeks persists.
Right from the first Monday of August, the bank has taken out billions of shillings in excess liquidity from the market every week day.
Tight liquidity usually makes it more expensive for traders to bet against the shilling, hence offering the local currency support.
Still, the shilling has weakened from 95 units to the dollar in May, to close last week at 102.25, with analysts projecting a further dip in coming days.
However, CBK remains optimistic that its efforts will pay off.
After its last Monetary Policy Committee (MPC) meeting on August 5, it sent out a statement saying: “The foreign exchange market was volatile in early July 2015, but has stabilised, reflecting in part the impact of monetary policy measures.
“In particular, Open Market Operations and the sale of foreign exchange by the Central Bank of Kenya have stemmed the volatility and resulted in tight liquidity conditions.”
The MPC bucked expectations of a rate hike during this month’s meeting, saying it wanted to give previous measures time to be “fully transmitted to the economy”.
The committee had held interest rates steady at 8.50 per cent in five previous meetings between September last year and May. In this time, the shilling dipped from 88.75 to the dollar on September 3 to 95.00 on May 6.
But Njoroge is on record telling Parliament that the factors hurting the local currency are beyond his control.
Nonetheless, the economics professor, who captured the nation’s attention when he turned down the trappings of power that come with his office, is starting at a volatile currency that would worry any governor.
He has asked the Government to rein in its debt and current account deficit to help stabilise economic fundamentals, including the exchange rate.
The regulator has said at various times that the current volatility that has hit the home currency had nothing to do with the way it is managing its monetary policy; instead, it is largely driven by a rebound of the American economy.
The Executive has also contributed to the pressures on the shilling through its increased spending on infrastructure projects.
FISCAL POLICY
The next monthly meeting of the bank’s Monetary Policy Committee is expected in September, and would be the fourth in as many months, suggesting that CBK is still apprehensive about the exchange rate.
The shilling is currently trading at near four-year lows against the dollar.
An overly volatile exchange rate could take Kenya’s economic train off-course. The country relies on imports, which it pays for in dollars. The exports that would bring US currency into the economy are still just a small fraction of imports.
As CBK pointed out earlier this month, “The current account deficit has widened mainly due to imports of capital goods and lower earnings from exports. Nevertheless, diaspora remittances have remained strong.”
Treasury, which is in charge of the country’s fiscal policy, continues to draw comfort from the fact that it is not just Kenya that is having a rough time with its currency.
“Kenya is not the only one affected by a strengthening dollar; all over the world, currencies have taken a beating. And compared to some developed countries and our regional neighbours, the Kenyan shilling is doing very well,” Treasury Cabinet Secretary Henry Rotich told Business Beat last week.
He also noted that there are benefits to a depreciating shilling, particularly for exporters who are earning more in terms of shillings for every dollar they receive for their products.
The biggest export beneficiaries are those in the agriculture sector.
“It is unfortunate that tourism is down. If it wasn’t, we would have created thousands of jobs as international visitors would be able to stretch their dollars further here, making Kenya an attractive destination,” Mr Rotich added.
“A weaker shilling is also exposing any underlying economic factors that may have been masked by a strong currency, giving us the opportunity to take corrective action.”
He argued further that a weak shilling should discourage the country’s reliance on imports and boost local production, particularly with a focus on export markets.
Aside from the increase in the import bill, there have also been fears that the country could sink deeper into debt. For instance, the Eurobond that Kenya successfully floated last year is expected to attract at least 14 per cent in additional costs associated with foreign exchange losses.
Treasury has, however, noted that not all its debt is in dollars.
“Don’t forget we also have liabilities in other currencies, as we have borrowed from countries like China, as well as European financiers who deal in euros,” Rotich said.
And as regards the country’s exposure, Rotich is counting on import cover of 4.3 months to provide necessary buffers to cushion the shilling should Kenya need to urgently use dollars to import commodities.
“This means that even if we did not get any foreign exchange coming into the economy, we could afford to cover our imports for 4.3 months. This strong position prevents speculative activity on the exchange rate. But the reality is dollars are still coming in, so our reserves aren’t being overly used.”
CBK has also implemented a new Cash Reserve Ratio (CRR) cycle that requires banks to maintain a cash reserve ratio of 5.25 per cent of their deposits in a month, starting on the 14th of every month. They, however, have the leeway of going down to three per cent, as long as the average for the month adds up to the required ratio.
pwafula@standardmedia.co.ke
