Governor: CBK taking steps to stem depreciation of Kenya shilling

The worrying decline of the Kenyan Shilling, yesterday forced out Central Bank of Kenya (CBK) governor Dr Patrick Njoroge from a self-imposed hiatus to give the strongest assurance yet that the local currency will claw back lost value against the dollar in the coming months.

The governor assured the local money market that an improved image of the country on the global stage and a positive outlook by the private sector, will improve how the shilling behaves in the coming months.

This message from CBK comes at a time when the forex markets remain jittery ahead of a gathering of world business leaders including US President Barack Obama’s visit to Kenya. The Global Entrepreneurship Summit is taking place in Nairobi between July 25 and 26, 2015.

While Kenya’s tourism sector, a key foreign exchange earner is on its death bed, a worsening current account deficit, has also been putting pressure on the local currency.

In a statement, the CBK assured the market that it has enough reserves to deal with short term shocks and is closely monitoring the situation and taking all measures to eliminate any disorderly market developments.

“The CBK stands ready to enhance its open market operations and other measures including intervening through direct sales of US dollars to commercial banks to stem a sharp depreciation of the Kenya Shilling,” stated Njoroge, in a statement to the media last evening.

The CBK said that while a strong US dollar on the global currency market had everything to do with troubles facing the local currency, it had enough foreign exchange reserves capable of dealing with short term shocks.

The Shilling has been weakening steadily against the US dollar in recent months. The increased volatility in the foreign exchange market forced Central Bank to move its scheduled Monetary Policy Committee (MPC) meetings from bimonthly to monthly events. Its next policy meeting is scheduled for August 5, 2015.

The main reason for the CBR hike to 11.5 per cent was to check inflation and defend the Shilling, but the moves appeared to have had little effect on the local currency’s slide.

Commercial banks have started increasing their lending rates and a number of institutions have already informed their customers that they will increase lending rates from next month. It remains to be seen whether monetary signals from the CBK will be picked up by forex market players.

“An important contributor to this trend has been strengthening of the US dollar against most currencies- including the Kenya Shilling. Current global trends have also dampened investor sentiments,” said Njoroge.

The CBK states that domestic factors have also contributed to the weakening Shilling against the US dollar. Huge demand for dollars due to large corporate deals, temporary liquidity surge in the banking system and the widening current account deficit in part, due to a huge volume of capital goods being imported into the country against dwindling export earnings, were cited as other contributors to the Shilling’s slide.

Some analysts have however said that CBK may not do much to salvage the Kenya Shilling from further weakening.

“When you look at the statistics, Kenya is still doing well in terms of macroeconomic stability with monthly inflation still below the double digit levels. However, with fuel prices edging up, we should be keen on what is happening to the Shilling so that we do not suffer big shocks from imported inflation,” said Dr Joy Kiiru, an economist at University of Nairobi.

The Kenya Shilling weakened on Thursday, slipping back towards three and a half year lows, mainly because of concern about the country’s current account deficit. Shares at the Nairobi Stock Exchange also continued on a losing streak.

Commercial banks were yesterday quoting the Shilling at 102.45 buying and 102.65 selling against the greenback, down from Wednesday’s close of Sh101.90 buying and Sh102.00 selling against the US dollar.

Figures from CBK indicate that remittances inflow to Kenya was resilient through May 2015. It increased by 7.9 per cent to US$ 129.1 million compared to $119.7 million in May 2014 and by 3.7 per cent when compared to inflows in April 2015.