The shilling slumped to an all-time low against the dollar on Thursday on increased demand for the greenback, traders said.
This came a day after President William Ruto assured the government would resolve the dollar crisis to avert an economic crisis.
Central Bank of Kenya (CBK) data shows the shilling exchanged at an average of 130.9941 on Thursday against the dollar – a new historic low for the official banking regulator's printed rate.
This came even as retail dollar buyers paid upwards of Sh140 per unit in banking halls as the demand for the greenback continues to surge.
This coincided with the shilling’s depreciation against other major currencies, including the British pound which exchanged at an average of 160.7794 per unit and the Euro at 141.3288 per unit, according to CBK data.
On Wednesday, President Ruto said the government would revamp the interbank foreign exchange market to ease access to foreign currencies. “We, through the Central Bank of Kenya (CBK), are having conversations to reinstate the interbank foreign exchange market," said Dr Ruto.
CBK consequently on Wednesday evening issued new guidelines to revamp the interbank market for hard currency. But analysts questioned the move, saying it could be counterproductive.
“If they wanted to close the gap, they could simply say a two per cent spread is allowed between buy and sell. Controlling the spread means they will break IMF (International Monetary Fund) rules around market controls,” said an analyst who sought anonymity so as to speak freely.
The new strict CBK-backed foreign exchange code states that market participants should not engage in trading strategies or quote prices with the intent of hindering market functioning or compromising market integrity.
Such strategies, the code says, include those that may cause undue latency, artificial price movements or delays in other market participants’ transactions and result in a false impression of market price, depth or liquidity.
“Such strategies also include collusive and/or manipulative practices, including but not limited to those in which a trader enters a bid or offer with the intent to cancel before execution (sometimes referred to as “spoofing,” “flashing.” or “layering”) and other practices that create a false sense of market price, depth, or liquidity (sometimes referred to as “quote stuffing” or “wash trades”),” says the code in part.
The banking industry regulator had earlier been blamed for the dollar crisis after introducing tough rules on the foreign exchange interbank market. But CBK Governor Patrick Njoroge has always downplayed the crisis.
The depreciation of the shilling continues to set up the country for a higher cost of electricity and debt servicing distress.
The scramble for the dollar means that buyers - both for trading and hedging purposes - will keep bidding higher for the currency.
Access to the greenback previously also proved difficult due to banks' unwillingness to sell to each other, which made it hard for smaller players to fulfil their orders from clients.
The volatility in the forex market has slowed dollar trading among lenders, causing a scarcity of the crucial currency.