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CBK must tame speculators to save shilling

By - | February 3rd 2013

The trend depicted by the shilling’s exchange rate against major world currencies in the recent weeks has become a major concern among investors.

For the last one month, increased volatility in the foreign exchange market, which has seen the shilling hit a low of 87.55 to the dollar on Saturday, has left importers reeling as the cost of imports rise and profitability margins dip.

In the next couple of days, projections indicate that the shilling will continue to weaken against the dollar, with analysts predicting an exchange rate of Sh90 to the dollar sooner rather than later.

Such news can only worry importers, as they will need more of the local currency to bring in any goods priced in the dollar.

While importers gnash at the development, exporters are smiling all the way to the bank as the trend means they will be earning more per dollar for any commodity exported.

Finance Minister Njeru Githae has blamed the shilling’s woes on speculators and cited huge dollar orders by three firms as the reason for the fall in value of the shilling. He also put on notice any firm or individuals engaging in speculative activities.

However, return of these speculators no doubt raises serious concern, which the regulators must act fast before things get out of hand. The startling revelations that speculators could be using the big orders placed by these firms to enrich their pockets, raises serious questions which must be addressed as matter of urgency with a final and last solution found to avoid similar scenarios in future. It is even worse for the currency to be thrown into the doldrums at a time when the country is headed for one of the most competitive General Election.

These are grave concerns given where we have come from as a country and need a serious rethink. The free-fall of the shilling presents an opportunity to come up with lasting solutions and not roadside declarations such as the generic style of the Treasury blaming speculators.

The speculators must be exploiting a loophole, which the Central Bank and the Treasury should seal. Kenya is a liberalised economy and there is real need to put measures in place to protect the country’s capital account.

Even as Central Bank pumps millions of dollars into the forex market and mopping up excess liquidity in a bid to tame volatility of the shilling and reduce inflation, a more comprehensively approach should be adopted.

To put the urgency of the situation into perspective, whenever any of these economic malfunctions pop up, including allowing free fall of the shilling, it is the poor who suffer the most. It is the poor who spend most of their income on basic necessities such as food, housing and shelter. Unfortunately for Kenya, the poor form the biggest chunk of the populace. Such economic mishaps have the potential of disrupting the national order. It will, therefore, be in the interest of all the parties concerned to seriously look at the current instability in the money market and address them as soon as possible. As the country moves closer to the election date, it is prudent that the threat to the local currency is fixed to avoid further suffering.

Those who know, say the problem of excessive volatility could be masking something more serious in the management of the country’s financial systems. It is, therefore, prudent for Githae, as the last political appointee to that office, to ensure he leaves a stable monetary system that can stand the test of time.

The CBK needs to move in decisively to assure the public and investor confidence in the management of the money markets.

Last year, CBK came under intense pressure amid accusations that it had colluded with wayward forex operators to cause an artificial weakening of the Shilling.

The situation saw some smart trader’s cash in heavily at the expense of the public. It occasioned a runaway inflation that saw basic commodity prices rise to levels never witnessed before.

Analysts have accused the CBK of being over protective of the local currency through mopping up of liquidity in the local market to support the shilling.

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