CBK under the spotlight as shilling hits a new low

The shilling Wednesday slid to a new low against the dollar, tightening the squeeze on importers and turning the heat on the Central Bank of Kenya over its handling of monetary policy.

The Kenyan currency traded at a historic low of Sh91.70 to the dollar as analysts hit out at the CBK’s failure to arrest or reverse the market’s expectations that are thought to be adding impetus to the slide.

“It is time for the Central Bank to drop the benign neglect of the exchange rate and intervene,” said Mr Razia Khan, the head of Africa research at StanChart in London. “Such a policy stance could stand when things are normal but when the market psychology has come to expect an increasingly weaker shilling, then there is a problem that needs to be resolved.”

Ms Khan spoke in Nairobi as the Central Bank of Kenya warned of possible action against three of the country’s six big banks that deal in forex.

CBK said a recent audit of the currency traders had revealed that the three were responsible for outflows totalling $237 million (just over Sh22 billion) in a single week – a move that the bank views as driven by speculation.

The shilling registered one of its steepest falls in recent times during the same period in what is now emerging as a double-edged sword that is hurting both importers and exporters.

CBK governor Njuguna Ndung’u confirmed that the regulator was preparing to take action on some banks to rid the market of the notion that nothing can be done to stop speculative activity.

“We have seen some of the bank treasuries people say there is nothing the Central Bank can do but we are definitely going to take regulatory action against three banks this time,” he said.

Prof Ndung’u said the amount of forex stocks in the market and an analysis of trading by individual banks and their parents or branches globally had convinced the CBK to take appropriate and corrective action.

“Our aim is to ensure that the forex interbank rate is truly driven by market events and fundamentals as is always the case and as the Euro crisis gets closer to resolution,” he said.

Forex dealers reacted cautiously to the governor’s warning saying there was a thin line between speculation

“If a bank engages in proprietary trading and it is within the core capital limits that would be all right. But if they are holding large amounts of forex than allowed by their capital and transfer the same to larger partners abroad to hide it that would be illegal,” said Mr Joshua Anene, a dealer at CBA who conceded that a $237 million trade would be on the higher side.

Mr Jeremiah Kendagor, the acting head of Treasury at KCB said that although $237 million trade is big enough to affect the direction of the market, banks are only required to alert CBK before transacting anything above $100,000,000 (Sh9 billion).

“There is no limit as to how much can be transacted and in my view, the CBK should find other ways of intervening as [regulatory sanctions] alone cannot correct the market. It has reached a point when they need to do something.”

Financial crisis

Commercial banks are key players in the forex market with stocks of $1.2 billion (Sh110 billion). This together with the central bank’s holding of just under $4 billion or Sh364 billion puts Kenya’s total forex holding at $5.3 billion – much larger than what the country held at the peak of 2008’s global financial crisis.

CBK action against currency traders is hinged on the powers granted under Section 33G of the Banking Act.

The law gives the regulator the power to appoint an officer to supervise a bank or a forex department if it is ‘acting to the detriment of public interest’.

Early, this year, CBK audited a number of banks as the shilling slid to an average of Sh84 to the dollar but reported finding no fault in their trading.

Sharp differences remain as to what is driving the shilling’s fall. While some analysts have maintained that the supply side mainly composed of rising demand for expensive oil and grain imports accounts for a large part of the currency meltdowns, other players – including the central bank – insist speculative currency trading is partly to blame.

The exchange rate turbulence is not unique to Kenya but is also shacking markets in neighbouring Uganda, whose currency fell to a historic low last week forcing the Uganda central bank to intervene.

Kenya’s central bankers Wednesday came under pressure to follow suit in expending some of CBK’s dollar stocks to shore up the shilling.

Prof Ndung’u’s insistence that influential banks are “trading on artificial grounds and want to protect the artificial and temporary economic rents”, however, pointed to the discomfort with such action.

The tussle over the most suitable cure to the currency fluctuations came as it emerged that exporters were hurting as much as importers because of the steep rise in cost of inputs and freight.

The twin costs are met in dollars and account for nearly two thirds of industry costs. Rising prices of chemicals and other farm inputs have significantly suppressed the earnings of fresh produce exporters – discounting the notion that they are benefitting from a weak shilling.

Stephen Mbithi, the chief executive of the Fresh Produce Exporters Association of Kenya (FPEAK), said a weak currency is increasing up to two thirds of the cost of doing the business while benefitting only 35 per cent of the sector’s operations.

“Air freight accounts for 45 per cent of the cost while inputs stand at 20 per cent, limiting any gains the export could make from the a weak currency,” said Mbithi.

Gain on one side

Ms Jane Ngige, his counterpart at the Kenya Flower Council (KFC), said a weak shilling was tricky for exporters who sell in dollars and a bit of euros as a gain on one side is offset by rising costs on the other side.

“Flowers are primarily billed in euros and the shilling which is also weakening against the currency, a plus, but farm inputs such as fertilisers and other costs such as freight are dollar denominated and are rising steeply as the local currency weakens,” she said. The Tea Board of Kenya, the regulator of Kenya’s top income earner, however, said the weak currency coupled with stable auction prices could push earnings beyond the Sh97 billion recorded last year.

“The exchange rate has been reasonable. Prices have not been very volatile and the exchange rate has not been too bad,” the agency told Reuters on Friday.

Auction prices have averaged $3 a kilogramme of made tea at the weekly Mombasa auction, above a similar period last year.
The Kenya Tea Development Agency (KTDA) which accounts for two thirds of total production said expensive farm inputs would erode gains on exports.

For an import economy like ours this is not good. There is also the multiplier effect on other factors of production like fuel and power.

The exchange rate is one factor. Until the accounts are read and closed, we do not yet know of the impact of prices, volumes, costs on cumulative performance,” said Lerionka Tiampati, KTDA’s managing director.