Njoroge says shilling’s fall now beyond CBK control

Central Bank of Kenya governor Patrick Njoroge on Monday said he was cautiously optimistic that the shilling would soon regain stability after persistent volatility that has seen it lose more than ten per cent of its value to factors he has no control over.

Dr Njoroge told the Senate committee on Finance, Commerce and Budget that the CBK has no target for exchange rate — meaning there is no red line to be crossed in the ongoing battle to stabilise the Kenyan currency.

He said last weekend’s visit by US President Barack Obama and the world’s top entrepreneurs attending the Global Entrepreneurship Summit was “very good and positive for foreign and local investors.”

“There is more confidence and people are placing positive bets. There is foreign currency coming into the market. Hotels were full not just for the visit, but there has been a spillover effect. We couldn’t have done a better job advertising the country to the world,”  he said.

Dr Njoroge said positive confidence arising from the summit was not just in the tourism sector, but across the entire economy.

“We are cautiously optimistic. I use this deliberately because we have brought down volatility in exchange rate. The markets were quiet last week,” he said.

The governor said the CBK’s focus would stay on stemming volatility in the exchange rate even as it stays alive to the risks and problems that would come with targeting a rate.

“We definitely want to be sure that if there is any movement, it is smooth and gradual,” he said adding that the large import bill, the shrinking exports, tourism slump, the huge public debt and other external factors were to blame for the shilling’s troubles.

“The total debt stood at 51 per cent at end of June. You may wonder what it will be at end of June next year. Whereas we are the financial advisors of government in terms of borrowing, we have no role after we have given our recommendations,” Dr Njoroge said.

Measures taken by the Monetary Policy Committee (MPC) on July 7 have had some effects in taming the shilling’s fall against the US dollar and other major world currencies, he said, adding that a tightening of liquidity was beginning to show.

“We are mopping up liquidity and the market is very tight on the shilling side,” he said.

The measures are expected to provide some relief, at least temporarily, as the regulator takes other measures to support the fiscal environment and provide strong confidence for the private sector.

READ: Weak shilling sends CBK back to the drawing board

The committee chaired by Mandera Senator Billow Kerrow sought to know the measures that the bank had put in place to reverse the shilling’s decline.

“We have seen that despite the measures the MPC took aimed at stabilising the shilling, the situation has gotten worse. This will have a major impact on the cost of living given the fact that our import bill is huge and growing,” Mr Kerrow said.

Dr Njoroge said the shilling had lost 11.5 per cent of its value since the beginning of the year. The shilling Monday weakened to 101.45/55 units to the dollar from Friday’s close of 101.15/25, which traders attributed to demand for the greenback from the energy sector.

“This (weakening) I would attribute to end of month demand. (It is from) energy sector as usual, which comes in at the end of the month,” a senior trader at one Nairobi-based commercial bank said.

He said the shilling was weakening despite rising interbank lending rates — a sign of tight liquidity that typically helps the shilling strengthen by making it expensive to hold dollars.

The weighted average interbank lending rate rose to 16.9627 per cent on Friday from 16.3769 per cent a day earlier. The lending rate yesterday hit a high of 17.50 per cent.

“My take is if we are at 17 per cent and the shilling hasn’t strengthened, it’s being driven by real (dollar) demand,” the senior trader said. Dr Njoroge told the Senate that the US dollar’s strengthening against major currencies was part of the problem.

“Since 2014, the shilling depreciated by 15.9 per cent. Other currencies of our regional peers have also depreciated dramatically but comparing ourselves with them does not mean we are okay,” he said.

Dr Njoroge said the anticipated rise in US interest rates in September was part of the challenge.

“There is a 50 per cent chance and that is the uncertainty that is the concern of currency market,” he said.

Domestic factors such as a weakening of earnings from traditional exports such as tea, coffee and horticulture over the 12 month period to May had left the shilling exposed.

“There has been a drop in tourist arrivals. In the 12 months to May, compared to 2012, we had only 675,000 tourist arrivals compared to 1.2 million, a drop of 40 per cent. That is a serious phenomenon and we attribute this to insecurity and the resulting travel advisories,” he said.

Dr Njoroge, however, said diaspora remittances have been rising becoming the strong point for the economy having netted $135.9 million (Sh13.7 billion) in June — an all-time record, adding that the huge import bill is driven by increased capital goods such as machine and equipment for aircraft and Standard Gauge Railway.