CBK boss goes all out to protect Shilling

CBK Governor and Chairman Monetary Policy Committee (MPC) Patrick Njoroge. [David Gichuru/Standard]

Central Bank of Kenya governor Patrick Njoroge has gone all out to protect the Shilling against the coronavirus pandemic that has wreaked havoc around the world.

After weeks in which the Shilling has been on a free-fall as foreign inflows dwindled, the local currency gained some ground against the dollar by Friday to exchange below 106.

However, official foreign exchange reserves declined to a four-year low of $7.97 billion, or enough to just cover only 4.84 months. This came as reports emerged that the Central Bank of Kenya had got into the open market to sell dollars in what was aimed at stabilising the local currency.

Although the reserves remain adequate, and meet the CBK’s statutory requirement to maintain at least 4 months of import cover, and the EAC region’s convergence criteria of 4.5 months of import cover, they have worryingly come close to the red line.

However, Njoroge will be happy that the Shilling is deflecting some of the pressure it has been feeling since Kenya announced its first case of the coronavirus disease (Covid-19) two weeks ago.

"The initial pressure on the Shilling was due to a strengthening of the US dollar against most currencies, and low supply. It exchanged at 106.20 on March 26 compared to 104.22 on March 19,” said CBK in its briefing.

International news agency Reuters quoted some traders acknowledging that some traders came into the market to sell dollars in a bid to salvage the Shilling, explaining the drain on its reserves.

The last time CBK was in the market was during demonetisation exercise which coincided with government paying part of its pending bills, thus increasing liquidity, according to the financial regulator.

Back then the Shilling took a beating exchanging at around 104 against the dollar. However, and partly due to CBK’s intervention, the Shilling bent back to its trajectory.

The current impact on the Shilling comes at a time when the International Monetary Fund (IMF) has asked bilateral lenders, mostly a club of rich countries, to immediately offer relief on debt repayment to some 71 developing countries including Kenya to avert an international monetary crisis.

Before things get better for the global economy, Njoroge will also be hoping that the money they have requested from the World Bank and International Monetary Fund, about Sh122 billion, will help replenish the reserves.

The government, which has been running on empty coffers, made the appeal to the development agencies as the novel coronavirus continued to wreak havoc on the country's health and economic fronts.

Central Bank of Kenya Governor Patrick Njoroge, in his press briefing last week, said that the $50 million (Sh5.3 billion) would be injected directly into the health system, which has been stretched by the increasing need for the country to arrest the spread of the pandemic.  

IMF promised to give another $350 million (Sh35 billion), which will be used to deal with the economic effects of the virus.

“This is assistance that does not have conditions," said Njoroge, contrasting the funds from the stand-by arrangements, which normally come with strings attached.

Besides helping pay pending bills, Njoroge said the funds from IMF will be used to replenish the country’s foreign exchange reserves.

The World Bank has committed to give another $750 million (Sh75 billion), which the country will use to support the well-being of poor people, some who may be rendered jobless as the economy comes to a standstill.

During the previous week, as the pandemic continued to wreak havoc, the country's reserve of foreign exchange dropped to $8,290 million, just enough to cover for five months.

This was the lowest import cover since the December 2017 period when the country had barely recovered from the effects of the just concluded elections which saw Kenyans go to the polls to elect their president twice.

CBK governor has been a staunch defender of the Shilling, particularly against speculators. His firm position has seen the local currency hold on stead against major currencies. Some critics have interpreted this as intervention by the CBK, sentiments that the financial regulator has flatly denied.

Sufficient foreign currency reserves are critical to the payment of the country’s imports from the world market as well as payment of debts to foreigner creditors by both public and private sectors.  

Indeed, Kenya’s stock of external debt increased by a staggering Sh158 billion in a week after the shilling buckled under the weight of the coronavirus pandemic crisis.

The local currency lost ground against the dollar by 500 basis points, a situation that saw the value of country’s foreign loans as of December last year increase from Sh3.11 trillion to Sh3.27 trillion.

However, the pandemic has seen the country witness low inflow of foreign exchange reserves due to limited exports of flowers, tea and coffee to Europe and North American which are under lockdown.

Other sources of foreign exchange reserves include tourist receipts, which have also fallen after country-restricted travel to tame the spread of the virus.

Europe, which is the main source of Kenya’s foreign tourists, has been hit hard by the virus which has so far claimed over 20,000 lives.

Besides the erratic inflow of dollars, expensive imports have also contributed to the weakening of the local currency.

Another reason that might have contributed to local unit ceding ground against the greenback is the decision by the CBK to buy dollars from the market.

However, the Shilling seemed to have recovered from that pressure before coronavirus re-awakened the pressure.  

Also, diaspora remittances from Kenyans living and working abroad, which are other sources of foreign exchange reserves, too, seem to have been affected by the deadly virus.

Kenya could also replenish its reserve of foreign currencies with borrowed cash. However, with a jittery market, securing a good credit facility is not going to easy for the country.

Even worse, Kenya is yet to sign up for the International Monetary Fund (IMF) insurance cover that would have provided an additional buffer in case of an external shock.

The country and the global lender have agreed on a three-year stand-by arrangement, though they are yet to finalise on it.

With almost no movement of people from one country to the other, Kenya Airways, among other airlines have been forced to institute cancellations of flights from some of its critical hubs citing low demand.

Some experts have even predicted that it will not be long before the global economy sinks into recession.

Kenya has so far confirmed 38 cases of Covid-19 and one death.

IMF, in its report published in 2018, found the local currency to have been overstated by a staggering 17.5  per cent, a position that prompted CBK to do its own assessment to dispute those findings.

However, CBK, in its assessment last year, insisted that the Kenyan Shilling was not over-valued and that its exchange rate is supported by fundamentals.

According to CBK, misalignment of the country’s exchange rate has been declining over time, from 4.1 per cent in the period between 2010 and 2016 to 2.6 per cent in 2014-2017, in what appeared to be a rubber-stamp on Njoroge’s leadership at the apex bank. The fund classified the Shilling as managed rather than free-floating.

"Reflecting limited movement of the shilling relative to the US$, MCM’s (Monetary and Capital Markets Department) 2018 report on exchange rate arrangement ... will reclassify Kenya’s shilling from ‘floating’ to ‘other managed arrangement," read the report.

Traders, investors and even consumers rely on real exchange rates to make critical financial decisions and any defects in the valuation mean it will cost them dearly.