Banks’ hand in fall of shilling as market starved of the dollar

Central Bank of Kenya Governor Patrick Njoroge holds the new 1000 shilling note with the old note during the media briefing on the new currencies notes [David Gichuru, Standard]

“Thanks to your hard work and commitment, our shilling has remained fairly stable and competitive.”

Central Bank of Kenya (CBK) Governor Patrick Njoroge must have been flattered by these words by President Uhuru Kenyatta.

But anyone who has been tracking the performance of the shilling against the major world currencies over the last four months would remember the president’s words with nostalgia.

His remarks came on December 11, 2018 at a time when the possibility of a virus casting a dark spell on the global economy and crashing financial markets only existed in the realm of science fiction.

At the time, the local currency had a good run against the dollar, trading at between 100 and 103 units since June 2015 when Dr Njoroge replaced Njuguna Ndung’u at the helm of CBK.

Today, the shilling is on a free-fall. And the soft-spoken CBK governor, for long seen as the vanguard of the shilling, seems to have lost the grip on the shilling.  

An astute disciplinarian, Njoroge does not hide his preference for order and stability in the financial market. Consequently, he has been tough on money changers in a bid to infuse discipline in the forex market.

Unlike his predecessor, he has also maintained an arm’s length relationship with bankers, shunning invitations for a round of golf with bank CEOs in his spare time. The running joke among bank honchos is whether they can survive the next 24 months of the no-nonsense governor.

But it is the zeal with which he has protected the shilling from cowboy-like speculation, and analysts from giving any media commentary on the shilling, that marks him out.

This has enabled him to stabilise the exchange rate, which hovered between 100 and 103 until the Covid-19 pandemic struck early last year.

The pandemic is no respecter of legacies. It has undone years of economic and financial achievements.

With the onset of the pandemic, there were suddenly more dollars flowing out of the country. This put the shilling under pressure.

Foreign investors pulled their money from the Nairobi Securities Exchange (NSE). And with lockdowns and prohibition on international flights, tourists stopped coming into the country.

The key market for Kenya’s flowers in Europe closed down.

It would have been catastrophic had it not been for the low demand for crude oil and the debt repayment holiday that Kenya got from a group of rich countries under the G20 banner.

Nonetheless, before Christmas last year, the shilling touched an all-time low of 111.59 against the dollar.

The local currency started to find its footing in the New Year as economies reopened. Then in the middle of the year, it suffered yet another muscle cramp and has been limping since then.

Since November 9 this year, the shilling has consistently been touching record lows against the dollar, with 112.38 of the local unit fetching one greenback at the close of trading on November 26, according to CBK data.

But that is the rate that banks have given to CBK, not the one that they are charging, a bank official who sought anonymity because of the sensitivity of the subject told Financial Standard.

Banks are selling the dollar at between 114 and 117 in a parallel market.  

Some experts reckon this is why the dollar is strengthening at the expense of the shilling.

The world, once again, is experiencing another bout of capital flight as money flows out of frontier and emerging markets to dollar-denominated assets in the US where the Federal Reserve is planning to raise the interest rate by winding down its stimulus package.

But economist Tony Watima says that even before the dollar started to strengthen, banks were grappling with insufficient supply of the greenback. The dearth in dollars has been aggravated by the CBK’s reluctance to sell the US currency to banks at a time when demand for the greenback has surged, according to Mr Watima.

“Banks have been complaining that CBK is not selling dollars, so what you have is what you deal with,” he said.

With a limited supply of dollars against increased demand, banks have been forced to increase the price of the currency by stretching their margins.

But CBK, says Watima, would rather banks cut their margins as a means to slow down the shilling’s fall than supply banks with cheap dollars.

CBK documents show that the financial regulator has been in the market for the past five months in a bid to stabilise the shilling. But this has had very little effect.

By the end of Friday, official foreign exchange reserves dropped by $100 million (Sh11.24 billion), an indicator that CBK was selling dollars to banks at a discounted rate to ease the pressure on the local currency. 

The early political campaigns also seem to be scaring away dollar investors, according to University of Nairobi economics lecturer Samuel Nyandemo.

Whatever the reason, the weakening of the shilling is hurting Kenyans.

Besides making investors jittery, a weak shilling also hits the pockets of households as prices of major consumer goods and services spike.

George Njenga, a clearing and forwarding agent, says the cost of importing vehicles has shot through the roof, making it difficult for people to buy cars.

For example, three months ago, a 2015 Nissan Leaf from Japan would land at the port of Mombasa at a price of $6,900. At an exchange rate of 109, this amounted to Sh752,100.

With the current official exchange rate of 112, the cost insurance freight (CIF) of the vehicle has shot up to Sh772,800.

At an exchange rate of 109, Mr Njenga paid import duty of around Sh496,000 on the car. This means it cost him Sh1,248,100 to import the car.

However, at an exchange rate of 112, the import duty has risen to Sh509,777. This translates into a final price of Sh1,282,577.

Forex losses owing to a weak shilling, said Kenya Power Chairperson Vivienne Yeda, will also contribute to an increase in the cost of electricity.

Because the firm purchases electricity from independent power producers in foreign currency and sells it to consumers in local currency, Ms Yeda said KPLC will pass on the forex loss to consumers.