Is CBK presiding over economic crimes?

By Billow Kerrow　

What ails the Kenya shilling? In spite of the several knee-jerk measures by the Central Bank, the shilling continues to depreciate. Even after the Central Bank Rates (CBR) was raised to 11 per cent this week, it remained in free fall, selling at over Sh104 to the US dollar on Friday. In its usual confusion, CBK has reversed its earlier proposal to sell dollars directly to the importers. Treasury too has taken its familiar line – asking for more IMF loans! Will these measures help?

Is the currency crisis due to increased demand for the dollar by importers? Highly unlikely! Import demands for oil and commodities have been gradual and does not explain overnight drop of Sh2-5 we have seen in recent weeks. In any case, CBK has 3-4 months import cover.

Is it the impact of Euro zone crisis? Not entirely. Kenya may be a major trading partner with Europe but certainly not with Italy, Spain or Greece that face the crisis. We export more to these countries and the payments are largely in Euros, which has lost value against the dollar. Arguments that importers are shifting to dollar from the euro does not count. Furthermore, there are many other countries with much larger economic relationship with Europe that have suffered only marginal depreciation in their currencies.

Inflation may also have contributed but not as much as the CBK would want us to believe; which is why I think raising CBR to 11 per cent is misplaced and likely to hurt the economy more. It is based on the notion that increased demand for dollars by the private sector is to blame, and hence the need for credit squeeze. The rising inflation is largely a function of the high energy cost occasioned by the drought and global oil prices, and erratic money supply adjustments will not help.

Our economy is not very sensitive to monetary instruments. In early 2009, CBK reduced CBR by 100 basis points from nine to eight per cent, and reduced Cash Reserve Ratio in order to encourage commercial banks to lower lending rates but it did not succeed. CBK pleaded with banks in vain. Higher risk perception by the banks aside, they didn’t play ball.

The exchange rate crisis started in 2008 when the shilling declined from Sh68 to Sh80 between September and October, losing substantial value. CBK blamed Safaricom investors offloading their shares after the IPO. That may not have been the real reason though. The CBK Governor has in the past come out strongly in favour of a weaker shilling, ostensibly to address the current account deficit. Similarly, Finance Minister Uhuru Kenyatta in his 2010/11 Budget speech urged him to pursue that policy. IMF also weighed in on the same policy after they granted the Enhanced Credit Facility (ECF) last year.

This explains why the Governor dillydallied earlier this year when the shilling started sliding very fast. A weaker shilling to help shore up the current account is a wrong policy. You cannot promote exports and enhance our competitiveness through currency devaluation, a failed policy IMF so catastrophically pursued in the 1980s.

Domestic and external shocks may be a factor in the currency slide. But truth be told, in our current predicament, it is speculation by some commercial banks that is largely responsible. These banks are engaging in economic crime, but for CBK and Treasury, the end justifies the means. CBK has itself alluded to this by stating categorically the banks are hoarding the dollars.

As the regulator, they know which bank is holding what amount. Are we seeing the return of political banks? The Government’s proposal to reduce its spending and borrowings, if at all, are welcome. Borrowing from IMF is taking the wrong turn.

But the solution to this crisis lies in CBK acting against errant banks. Period.