Central Bank of Kenya calls for calm as shilling slides

The sound of a falling shilling can taint the legacy of Kenya’s central bankers, cause panic and spark raging debate on its impact on the economy.

Former Central Bank of Kenya (CBK) governor Njuguna Ndung’u saw the shilling swing between 67 and 92 units to the dollar when he took office and when he left.

But in between, there was the 2011 depreciation of the currency to a low of 107 units, which was followed by 19.72 per cent inflation in November. The slump led to a parliamentary probe that blamed Prof Ndung’u for hesitating to act and propelling the slide.

In 2015, the current governor, Patrick Njoroge, had Kenyans holding their breaths once more when the shilling almost touched the 107 level.

In September that year, the shilling slid to 106 against the greenback, but then dramatically strengthened to 100 units and stayed there for a year.

Investor anxiety

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However, the lull seems to be over as the shilling loses ground to the dollar, with a 1.4 per cent decline this year to 103.9 units. The reasons behind the slide are varied, but key among them has been a stronger dollar that is wreaking havoc in most emerging markets.

According to financial news wire Bloomberg, the shilling has fallen every trading day since December 23, a week after the US Federal Reserve raised interest rates.

“Uncertainty relating to the tightening of US monetary policy and its implications for global capital flows remain a concern. The strengthening of the US dollar may result to further capital outflows from emerging markets and a weakening of their currencies,” CBK wrote to Business Beat.

Public commentary has, however, steered more towards investor anxiety over instability in an election year. The slide has also come at a time when the country is making coupon payments for the Eurobond tap sales. As this is done in dollars, it has eaten into reserves.

On the last trading week of the year, the country’s forex reserves hit a 12-month low of 4.56 months of import cover. Dollar reserves stood at $6.97 billion (Sh723.8 billion), below the psychological mark of $7 billion (Sh727 billion).

As in 2015, the governor has stamped his authority and summoned traders, banks and analysts and warned them against projecting a further slide of the shilling.

Bloomberg reported that executives from some of the country’s biggest lenders were summoned to meetings with policy makers last week and cautioned against making comments or forecasts about the shilling deemed overly negative amid the currency’s worst run of losses since 2006.

Some of the analysts Business Beat spoke to declined to speak on the shilling, citing regulator caution.

Further, during annual projections by Stanbic Bank last week, CEO Philip Odera said anxiety in the forex market was overblown.

He said the shilling’s slide is a function of importers building up stocks, large oil imports and dividend payments, as well as a post-Donald Trump gain on the promise of tax cuts and infrastructure spending.

“This disconnect between supply and demand is very normal during this time of the year. We have seen some statements that are bordering on irresponsible commentary,” Mr Odera said.

And Dr Njoroge appears to be taking a proactive approach to the currency’s slide, with CBK mopping up excess cash in the market to check the ability to buy dollars.

The latest data shows the regulator removed Sh42 billion from the market, and injected Sh18.6 billion through reverse repos, which it has been using for more than a year to shore up banks struggling with liquidity.

Gag order

CBK has also been selling dollars in the market, although its gag order has left traders tight-lipped on the amount used to support the shilling.

Forex reserves also gained in the first week of the year to $7 billion, or 4.62 months of import cover, with the country receiving a steady stream of diaspora remittances.

Although the latest figure has not been released, Stanbic regional economist Jibran Qureishi intimated people living abroad are usually more willing to send resources home during a difficult period. With the current drought and elections close, Kenyans abroad might just be the shilling’s saviours.

The Treasury has also indicated that Kenya is raising at least $1.3 billion (Sh135 billion) through syndicated loans, financing that will help shore up forex reserves.

The shilling’s strength is important to the country as Kenya imports more than it exports.

A weak shilling would increase the cost of good from abroad, sparking inflation. This would be terrible in a year when election fears may lead to hoarding and stockpiling, increasing demand and, therefore, the cost of goods. The current drought already threatens to increase the cost of food, the main component of Kenya’s inflation rate.

This would have a domino effect as CBK will be forced to adopt a tightening stance and raise interest rates, though this will not help matters much as credit growth is already low and non-performing loans are at a record high.

CBK, however, remains positive Kenya will ride the wave as key macroeconomic indicators, including inflation, have remained relatively stable.

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