Banks now say there is a high demand for dollars amid a biting shortage, making the cost of obtaining the critical currency go through the roof.
Under the aegis of the Kenya Bankers Association (KBA), the lenders said there is elevated dollar demand by companies to pay dividends and meet their overseas obligations in the wake of a strong Covid-19 recovery.
“We have been in constant contact with the Central Bank of Kenya (CBK) to address the strong demand of dollars in the market. The Central Bank, having the best view of the market situation, has assured us that the market is well balanced in terms of supply and demand of dollars,” said KBA in a statement yesterday, even as it denied reports that the regulator, has been interfering with the foreign exchange (FX) market.
KBA explained that the country’s reserve of foreign currencies has been constantly replenished by export earnings and remittances.
However, external obligations, particularly import payments, have been growing faster. “This, we believe, will stabilise in due course, and the market will revert to normal,” said KBA in the statement signed by its Chief Executive Habil Olaka. There have been reports of shortage of dollars in the market, a situation that has made it difficult for traders to import raw materials and finished goods.
Because the dollar is the single largest currency for global trade, a low supply of the currency negatively affects its price.
However, Kenya has not only been paying its external loans as they mature using dollars, but CBK has also heeded the International Monetary Fund’s (IMF) advice to stop propping up the shilling but instead let the exchange rate be used as a shock absorber.
“The CBK appropriately allowed the shilling to act as a shock absorber during the pandemic and should continue to do so while using forex interventions only to minimise excessive volatility,” said the IMF.
It also noted that CBK “should continue to do so (using the exchange rate as a shock absorber) while using forex interventions only to minimise excessive volatility.”
According to the received wisdom, flexible exchange rates insulate economies from external shocks such as the Covid-19 pandemic.
Noting there is a shortage of dollars, banks have also been pushing for CBK to get into the market and sell the greenback to forex traders at a subsidised rate. Unfortunately, it seems like the CBK’s pace of allowing the local currency to weaken has been falling behind market expectations, according to EFG Hermes, an Egyptian-based investment bank.
This can get worse in what the firm described as a “thin FX market” like Kenya’s, resulting in more cautious behaviour from market participants. “Sellers of FX tend to be slower in selling their holdings of foreign currency, while buyers tend to exaggerate their demand in order to secure larger amounts of FX (as a way of a hedging).”
The bank said the pressure on the country’s external accounts came under pressure after the Ukraine war, which pushed up the price of imports such as wheat, fertiliser and fuel.
The shilling, which has been hitting new lows every day, is now trading at Sh115.7.
When the Covid-19 broke out, there was a capital flight as foreign investors, spooked by news of the first case of coronavirus in the country, evacuated their wealth from the Nairobi Securities Exchange (NSE).
And as governments imposed travel restrictions, tourism earnings dipped while lockdowns in Europe and America affected Kenya’s export earnings - limiting supply of dollars.