Treasury blames manufacturers for artificial dollar shortage

National Treasury Principal Secretary (PS) Julius Muia. [Elvis Ogina, Standard]

The National Treasury has blamed manufacturers for an artificial shortage of dollars in the foreign exchange market following their public comments.

Speaking during the launch of the World Bank’s latest Kenya Economic Update yesterday, National Treasury Principal Secretary (PS) Julius Muia said the government has enough foreign exchange reserves to cover the country’s import needs for over five months.

“Therefore, there shouldn’t be a problem in terms of availability of the hard currency,” he said. Dr Muia told manufacturers that the shortage had been caused by their sentiments.

The Kenya Association of Manufacturers (KAM) recently raised concerns over the shortage of dollars in the market. However, the PS said manufacturers might have started working on the premise that there is a shortage of dollars, which created panic in the foreign exchange market with people accumulating the hard currency.

“They create an artificial shortage which is not reflecting the reality on the ground,” he said.

Dr Muia’s remarks come at a time when one of the manufacturers, Pwani Oil, temporarily closed its Kilifi-based plant, citing difficulty in accessing dollars to buy raw materials.

However, Pwani Oil, like many other firms in the edible oil market, has also had difficulties buying palm oil, the raw material used in the production of cooking oil.

A tonne of palm oil, which Kenya buys from Malaysia and Indonesia, is currently going at $6,500 (Sh760,000) compared to around $4,000 (Sh467,000) a year ago.

Central Bank of Kenya (CBK) Governor Dr Patrick Njoroge laughed off suggestions that there is a shortage of dollars, saying in a recent press briefing that the local foreign exchange market produces close to $2 billion (Sh233.8 billion) every month.

Dr Patrick Njoroge. [Elvis Ogina, Standard]

Manufacturers, such as Pwani Oil, have been pushing for CBK to intervene by releasing more dollars to avert a crisis.

“The situation can only improve if the dollar situation improves. And I am not seeing the dollar situation improving on its own without the CBK intervening and releasing some of the dollar reserves that they are holding to stabilise the dollar demand in Kenya,” said Pwani Oil Commercial Director Rajul Malde as quoted by one of the local dailies.

CBK, however, has not been very keen to intervene. Instead, it has opted to let the exchange rate take its own course, following the advice of the International Monetary Fund (IMF) and the World Bank.

IMF in particular has asked CBK to let the exchange rate act as a shock absorber. And CBK seems to be a good student.

“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.

Forex interventions should only be made to minimise excessive volatility, said the Washington-based institution, which has a three-year programme with Kenya aimed at helping the country reduce its debt vulnerabilities and economy recover from the blows of the Covid-19 pandemic.

A widely held view by economists is that flexible exchange rates insulate economies from external shocks such as Covid-19.

When a currency is devalued its demand also goes down, with the country’s exports fetching more in the global market. Imports such as palm oil, however, become expensive.

Unfortunately, it seems like CBK’s pace of allowing the local currency to weaken and act as a shock absorber has been falling behind market expectations, according to EFG Hermes, an Egyptian-based investment bank.

This can get worse in what EFG described as a “thin FX (forex) market” like Kenya’s, resulting in more cautious behaviour from market players.

Treasury CS Ukur Yatani. [David Njaaga, Standard]

“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 hedging),” says the investment bank in an analysis.

The situation might also be getting out of hand with reports that companies such as Pwani have been requesting to be paid in dollars, raising fear of dollarisation of the economy - where people opt to settle transactions using dollars as opposed to the country’s legal tender.

The dollar has generally been strengthening against other currencies, with capital fleeing from the frontier and emerging markets to the US where there are better returns.

As a result, the Nairobi Securities Exchange (NSE) has suffered haemorrhage as foreign investors exit the bourse for safer assets back home. 

Tourist receipts, critical foreign exchange-earners and export earnings are yet to return to their pre-pandemic levels.

Things would have been worse for the Kenya Shilling if it were not for the steady inflow of diaspora remittances from Kenyans living and working abroad.

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