Forget shilling's gain against dollar, economy under firm grip of cartels

Treasury CS Njuguna Ndungu. [Elvis Ogina, Standard]

The forex market was thrown into a spin this week with the exchange rate of the shilling to the dollar appearing to be on a free walk across the commercial banks.

A quick scan of the rates posted online showed the best rates on offer being by Equity Bank, buying the US$ at Sh135.8 and selling at Sh140.8 at the close of the markets on Thursday.

While there had been gradual gains in the shilling the week before, the events of these past three days can best be described as dramatic. They seem to defy any logic or market fundamentals.

The question left in the minds of many folks and businesses is; What is going on and what do we expect in the coming days?


For several months, from mid-last year, the forex market had been heating up in anticipation of the Eurobond bullet payment that was due on June 24, 2024. At the policy level, the government had taken an unholy policy stance of letting the exchange rate to market forces. From an analytical point of view, this policy position defied basic wisdom given the country’s economic realities on export-import imbalances.

With hindsight, the volatility witnessed with the exchange rates this week should be no surprise. This is because there has been sustained policy incoherence since the Kenya Kwanza administration took over the reins of power in September 2022. Both financial and capital markets are governed through policy coherence to assure a certain level of stability and predictability. In the absence of coherent policies, the markets run on speculation and insider-wheeler dealings.

Take, for instance, the likely triggers of the current predicament. As of the end of January, all indications were that the government had succeeded in setting adequate dollar buffers not to disrupt the dollar market in June. The IMF and the World Bank had publicly declared huge lines of credit available to the country for up to three to five years.

In addition, there have been sustained indicators that our tourism sector has bounced back for the past three quarters with the influx of cruise ships and chartered planes to Mombasa. At a personal level, I have used the SGR and flights on the Mombasa - Nairobi route several times this year and the tourism numbers are evidentially noticeable.

Given these facts, therefore, no market analysis or expert opinion had expected the government would be back in the international markets earlier than the last quarter of the fiscal year. However, speculations remained live after the promised voluntary buy-back set for December 2023 failed to take off, with no official explanation for the same.

Evidentially, the centre had been growing hot with a fallout that culminated in the premature exit of the country’s debt chief Haron Sirima from the Treasury. This alone speaks volumes as to the potential boardroom wars that might have been going on behind the scenes on the country’s debt management strategy.

Although not entirely surprising, the Monetary Policy Committee’s move to increase the base rate further to 13 per cent, the CBK governor’s signal that the dollar rate had overshot their imagined equilibrium and a surprise offer to buy back part of the due US$ 2 billion Eurobond, all in the same week, were clear signals that the market probably missed pricing correctly. From a technical standpoint, this might also explain the nature of our financial and capital markets.

In theory, our markets would be classified as semi-strong efficient under Eugene Fama framework of market efficiency. This measures a market’s capacity to absorb new information and correctly price it on asset prices traded within that market. The less efficient a market is, the higher the potential of insider trading and collusive power to make abnormal returns for a privileged few market players. Going by the events of this past week, it seems our market oscillates towards the weak form of efficiency with powerful organized cartels dominating the markets to control asset prices.

The shilling has gained against the US dollar. [iStockphoto]

At this point, it is not clear if a prospectus was ever published of the planned new Eurobond issue to explain the terms and amounts on offer. The question left unanswered is whether Treasury mandarins applied the rule book of surprise to knock these cartels off-balance.

If this is true, what did they know about these cartels and why did they not use the regulatory powers vested in key public institutions? Or was it a case of dethroning one cartel and replacing it with another? The political rhetoric on the dollar coming from the administration’s elites does not make matters any better. Instead, it heightens the tensions. 

Concurrently, the 8.5-year Infrastructure bond that has been on offer since the last week of January was expected to bring in significant dollar inflows based on the anticipated returns and easing of interest rates in the US and key markets in Europe.

The payments are due on Monday, February 19, 2024. It is not yet clear how much of the accepted bids were from diaspora and foreign investors. What is evident is that the domestic market seems to have whetted the appetite of foreign investors with its highly sweetened returns.


The dollar exchange is expected to continue on its free walk into the next week before we see a sense of stability. This is because the dollar supply-demand equation has drastically tilted in favour of supply with weak demand, at least up to early next week.

The government has accepted bond offers of about Sh466 billion in a single week assuming an exchange rate of Sh150 to the dollar from the Eurobond and Infrastructure bonds that were on offer. The weekly performance of the Treasury bills has significantly improved in the last three weeks with the government surpassing and accepting above their offers across the three categories of 91, 182 and 365 days.

This means over Sh500 billion shall be expected to flow to the government accounts at the Central Bank by 2 pm on Monday. Foreign investors will be looking for the shilling in the intervening days to pay for their bids. The speculators are expected to continue offloading their dollar holdings to mitigate any further losses.

Based on this fact, it is evident that by the time the dust settles, a lot of losses will be borne by dollar holders and businesses that had taken positions based on the weak shillings. In the medium term, many businesses will suffer losses from expensive imports should the shilling maintain its strength against the dollar.

Notably, there has been a major policy shift by the government to intervene in the dollar market going forward. That means it is very unlikely that the Treasury mandarins will let the shilling slip back to the Sh160/170 levels again. At the close of markets on Thursday, the CBK had intervened to stabilize the shilling at Sh140 to the dollar.

Overall, however, what matters to the economy and for businesses as a whole is the stability of the exchange rate, not the individual actual rate. Exchange volatility is very toxic for businesses and investors since it makes the operating environment very unpredictable. In essence, it becomes very difficult to make production and investment decisions or plan for exports and imports. This explains why it is very reckless for the government to appear to let the markets operate either at the whims of individual office bearers or powerful cartels.

That notwithstanding, freedom is coming soon to the dinner table for the real hustlers, in as much as they may not have been party to the shenanigans happening in the dollar market.