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Central Bank of Kenya Tries to Curb the Weakening Shilling

The Kenyan Shilling

The Central Bank of Kenya (CBK) has noted that four large banks are holding very large overseas positions which do not reflect Kenya’s trading fundamentals thus increasing the the pressure put on the exchange rate.

The CBK, Governor, Professor Njuguna Ndung’u said their positions are largely associated with their group companies overseas. “We will restrict them from any arbitrage using the domestic currency.”

Professor Ndung’u who was speaking during a media briefing said CBK has taken the necessary measures as a regulator “we have written to them” he confirmed although he refused to name them.

In Kenya banks are classified using international standards, where 6 banks are classified as large, 22 middle and the rest, 23, as small.

However, in the past one week, five banks exported over US $ 260 million. During the same period, the volume of borrowing from Central Bank by strong banks went up – suggesting arbitrage opportunities.

“Speculation comes in when, at the same time, they drive the bids in the domestic currency market,” he said adding “this is what we have observed as well.”

The Governor is optimistic the country is not going to experience further weakening of the shilling. He said they have taken appropriate and corrective action to make sure the forex interbank market is truly driven by market events and fundamentals as should be the case and as the Euro crisis seem to be getting closer to resolutions.

The ongoing CBK analysis on the weakening shilling against international currencies shows the current level of the shillings is being driven by speculative activities of the market and temporary events in Europe (Greek Debt crisis) in addition to domestic supply of food and expectations of forex shortage.

In future, CBK will allow all institutions licensed to trade in foreign exchange to make bids when CBK is buying or selling – this will remove the dominance in the market and make forex trading competitive. This is based on the argument that there is adequate foreign exchange reserves in the market.

The bank has taken a cross-cutting measure to curb food and fuel crisis effects on the domestic market while salvaging the weakening shilling. The weakening is driven partly by the crisis in the Euro Area, whose shock waves are impacting on currencies and money markets around the world by tightening monetary policy stances.

The Governor explained that depreciation of the shilling cannot affect inflation given the that money supply growth is constrained.“The current level of the shilling does not therefore reflect the true value of the Kenya shilling, so it will still recoup its true value once the crisis is over,” he said.

Total forex holdings in Kenya stands on average up to now US $ 5.133 billion of which CBK is holding on average US $ 3.904 billion and Commercial banks are holding on average US $ 1,229 billion.

Prof Ndung’u who is a former director of training at the African Economic Research Consortium (AERC) explains that “this is even much higher than during the global financial crisis. This shows that the current crisis should not be exaggerated. More importantly, current situation is temporary, does not reflect the Kenya economic fundamentals.”

However, there have been speculations that traders in the money market are borrowing cheaper cash from the central bank and lending it back to the government at a higher rate to cash on the differences between the central bank rate (CBR) and the rate of Treasury bills.

The Treasury bill is a borrowing instrument issued by the Government through the CBK to raise (borrow) money on short term basis from the public. They are issued in maturities of 91 days and 182 days at a discounted price to reflect investor’s return and redeemed at face (par) value.

Razia Khan - Standard Chartered Bank

Standard Chartered Bank’s London-based Regional Head of Research for Africa, Ms Razia Khan, visited Nairobi on Wednesday 22nd June 2011 and called the CBK to tighten its monetary policy stance by raising the policy rate (also called CBR).

Ms Khan based her argument on the fact that the central bank rate (CBR) is at 6.25 per cent while the 91-day treasury bill rate is as high as 10 per cent thus traders gaining almost four shillings out of every hundred lent to the government.

The bank refuted this claims by saying that they have taken all the necessary measures to reduce money supply in the market with increased CBR borrowing rates to commercial banks which will be automatically passed on to customers.

She said the tightening would also prevent further falls of the exchange rate which is currently the main cause of rising inflation apart from the supply side shocks relating to the prices of international commodities and food.

Nevertheless, Khan said market psychology has been atuned to expect an increasingly weakening shilling. But, “fundamentals indicate that there is really no good reason for the local currency to depreciate to the extent it has in the past few months.”

About Robert Okemwa Onsare

Robert Okemwa Onsare
Robert Onsare is pursuing Electronics Technology at the University of Eastern Africa, Baraton. He is a Cluster Strategy trained facilitator by Kenya's National Economic and Social Council (NESC). Mr Onsare has been an incubation student at the University of Nairobi, School of Engineering, FabLab, a venture project of the university and Massachusetts Institute of Technology (MIT). He is a member of the African Technology Policy Studies Network (ATPS) and a published poet. Mr Onsare is based in Kenya.

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