Shilling edges towards Sh160 to the dollar despite CBK assurance

Financial Standard
By Brian Ngugi | Jan 02, 2024
Unprecedented new low against the dollar last week is attributed to a surge in demand for the greenback. [Elvis Ogina, Standard]

The value of the Kenyan Shilling is hurtling fast towards a ="https://www.standardmedia.co.ke/article/2001486710/us-rates-is-there-light-at-end-of-the-tunnel-for-battered-shilling">new record low< of 160 per unit against the dollar, leading to further financial distress for consumers in the New Year.

The shilling reached an unprecedented new low against the dollar last week due to a surge in demand for the greenback, traders said.   

Traders told The Standard that the shilling appears poised to surpass the 160 threshold in its exchange rate against the US dollar, despite efforts by the State to prevent its decline. 

The continued weakening of the Shilling now poses a fresh headache for the Kenya Kwanza administration and the banking regulator. President William Ruto in his New Year address promised a softer landing for Kenyans this New Year.

According to ="https://www.standardmedia.co.ke/business/business/article/2001486790/more-pain-for-borrowers-as-cbk-moves-to-rein-in-living-cost-crisis">Central Bank of Kenya (CBK)< data, the shilling has now reached a historic low for the official banking regulator’s printed rate, with an average exchange rate of 156.4618 against the dollar.

A spot-check ahead of the New Year holidays by The Standard discovered that retail dollar buyers are currently paying up above 160 per unit in banking halls due to the increasing demand for the greenback.

The CBK Governor ="https://www.standardmedia.co.ke/business/business/article/2001484012/more-demand-for-the-dollar-to-blame-for-a-weakening-shilling-kamau-thugge">Kamau Thugge< said in early December that the banking regulator’s unexpected increase in the key lending rate will help prevent dollar hoarding as the shilling edges towards the 155 mark against the greenback.

The apex bank raised its benchmark lending rate by a significant 200 basis points to 12.50 per cent from the previous 10.50 per cent.

The rate - the highest in a decade and near levels last witnessed in 2012 during the Kibaki era - was in a bid to stabilise the flagging shilling and rein in the runaway cost of living, said the CBK.

Dr Thugge had said at the time the aggressive monetary policy stance had put on notice individuals stockpiling dollars in the hope they would cash in from the shilling fall at a later date.

“The actions that we have taken to raise the CBR (Central Bank Rate) by 200 basis points, that should reduce pressure on the exchange rate,” Dr Thugge said during a post-Monetary Policy Committee meeting press conference with journalists in Nairobi in early December.

He also reckoned the surprise move aimed at stabilising the exchange rate will dissuade those hoarding dollars in turn bringing more greenbacks into the banking system.

“I know there are a lot of people who have been holding dollars in the banks or even dollars as an investment asset expecting the shilling to go up. We are determined to make sure we are going to tighten the monetary policy until the exchange rate is stabilised and finds its true level which in my view the current rate has overshot that true value,” he had said.

“We do believe that once those holding dollars know that we are serious and determined to stabilise the exchange rate, we should see a flow of foreign exchange back into the interbank foreign exchange market.”

The tightening of liquidity has however hurt access to credit for individuals and companies, with borrowers feeling the financial pain of the increased cost of loans.

This has translated into banks ="https://www.standardmedia.co.ke/business/business/article/2001487027/more-pain-for-borrowers-as-big-banks-pass-on-interest-rate-hike">tightening their lending standards<. 

Banks have steeply increased the cost of loans with interest rates beyond 20 per cent, leaving their customers with a massive debt servicing burden.

“Due to the prevailing macro-economic environment and increasing interest rates, we wish to advise you that our new Base Lending Rate for Kenya Shilling Credit Facilities is now I4 per cent p.a. with effect from November 7, 2023,” noted Cooperative Bank of Kenya (Co-op Bank) in an update to its customers recently.

The steep rise in the cost of loans by banks has come at a time when the high cost of living is already squeezing Kenyans hard.

The sharp rise in interest rates also threatens to choke economic growth as it will lift borrowing costs and encourage cutting costs or saving over spending, investing, and hiring, experts warned.

If lending dries up, that could weigh down on the value of stocks, real estate and other assets besides crimping overall demand — a recipe for a painful recession. 

At the same time, higher rates have increased borrowing costs. Dr Thugge had, however, defended the hike, saying it is the best weapon to cool off the shilling in the prevailing circumstances.

Investors are known to hoard dollars for speculation purposes in the wake of forecasts showing that the shilling would remain weak against the US currency. With the expected decline, those holding dollars later convert their money to shillings at a gain or do not suffer conversion losses when importing.

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