CBK moves to defend shilling with new forex trading rules
Prof Njuguna Ndung’u, the CBK governor, who has said that the bank will be involved in the direct sale and purchase of dollars to protect the weakening shilling. File
The Central Bank of Kenya Tuesday moved to stem the shilling’s slide with a policy shift that will see it sidestep commercial banks to directly buy and sell foreign currency to key sectors of the economy. (READ: Shilling weakens further on high dollar demand)
The decision, which analysts said amounted to a return to currency controls, targets commercial banks and the power they have had over forex trading, and ultimately, on the exchange rate. “The Central Bank now proposes to sell foreign exchange directly to targeted sectors of the economy which are most beneficial to the widest public,” Prof Njuguna Ndung’u, the CBK governor said in a statement.
Direct participation in the currency market gives the central bank the power to directly defend the shilling, which has lost more than 25 per cent of its value since January.
CBK has consistently blamed speculation by currency traders for the shilling’s troubles and has recently taken strong measures — including the regular sale of dollars in the market — but that has had little impact on the exchange rate. Prof Ndung’u said he expected the latest policy action to shift a significant component of the demand for foreign exchange away from commercial banks.
“The Central Bank will initially work with the Energy Regulatory Commission to identify importers in the oil sector, who obviously affect the widest public,” he said.
CBK said it had acted on the realisation that importers were being driven into a captive position where they have to pay whatever is demanded from them.
“Further, the Central Bank has noted that the foreign exchange it has been using to moderate the weakening of the shilling has been acquired by those who were already in possession of foreign exchange,” Prof Ndung’u said.
Economists said the decision risked establishing a two-tier currency market unless the CBK moved further to determine where the interbank trading will take place.
“This certainly holds the risk of establishing a two-tier forex market unless the CBK restricts where the shilling is trading on the interbank market,” said Razia Khan, the London-based head of research for Africa at StanChart.
Ms Khan, however, said selling directly to importers in critical sectors would ensure they get forex at a better rate and hopefully control overall forex demand that the banks have been seeing in the market and which has been the main driver of the shilling’s slide.
Prof Ndung’u did not state how CBK will price its dollars in the direct sale market making some analysts to insist that it amounted to a virtual return to controls.
“It creates a market where the price would be set by the regulator for the big importers leaving the rest to face the market,” said Robert Shaw, an analyst.
Mr Shaw said the action nearly amounted to a return to exchange rate controls during which the Forex-Cs – were bought at a premium to control currency pricing.
“Anything that gives the CBK powers to intervene in a select way raises a lot of questions,” said Mr Shaw. “It creates new arbitrage opportunities where the big importers can buy dollars from the Central Bank at a discounted price and resell the same to other players at a higher rate, further escalating the exchange rate crisis.”
The shilling continued its slide against the dollar in Tuesday’s trading – shedding 1.85 per cent of its value to close at Sh103 to the greenback defying the central bank’s action.
CBK has until now restricted its intervention in the currency market to buying or selling foreign exchange to influence the direction of the shilling.
Its new policy comes less than five days after it assured the public of its commitment to a market-determined foreign exchange rate as long as it was supported by fundamentals.
“Friday’s press statement and today’s are essentially inviting people to take their money out of the shilling while they can,” said Aly Khan Satchu, an analysts. “He is essentially saying it will no longer be a free market and people’s money will only be convertible at the central banker’s discretion. That’s the bottom line.”
But Prof Ndung’u, however, said CBK had taken action because its previous efforts at moderating the shilling’s slide through direct sale of forex to commercial banks had not worked.
“This has not achieved the desired objective due to lack of support from those who are in the fortunate position to be holding foreign exchange at this time. Therefore, this has failed to get through to the final importer to the detriment of both the economy and the price level,” he said.
Forex traders said central bank’s was generally a statement of the bad blood that has existed between the regulator and the commercial banks in recent months of exchange rate turbulence.
“The regulator is punishing the wrong players,” said one dealer with a commercial bank adding that it is the oil marketers and manufacturers who have been pulling down the shilling with huge demand for dollars.
“I don’t see how this thing will work. I have a relationship with a customer who we have given a loan. I expect that this customer will reciprocate by buying dollars from me. So I don’t see how the CBK will suddenly get this business from me,” said the dealer who cannot be named for fear of a possible reprisal from the central bank.
additional reporting from Reuters
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