Bank CEOs to meet governor as shilling hits 106 to dollar

The Central Bank of Kenya (CBK) has summoned the chief executives of commercial banks for an emergency meeting on Tuesday to discuss the exchange rate as the shilling approaches the all-time low rate of 107 units to the US dollar.

As at the opening of markets Monday morning, commercial banks sold the dollar for Sh105.64 on average while the forex bureaus sold the same for as high as Sh107.

Bank rates, however, went up in the afternoon as the institutions were selling the dollar at Sh106.60 at 2.30pm, only 40 cents short of the Sh107 low achieved on October 12, 2011.

This caused an escalation in prices with overall inflation rising to nearly 20 per cent in November of that year while the benchmark policy rate rose to 18 per cent that December.

The latest meeting with banks comes two weeks ahead of one normally held by the Monetary Policy Committee (MPC), which is scheduled for September 22.

“Given that the MPC meeting will be held later this month, the [Central] Bank considers it appropriate to discuss recent development in the money market, particularly the foreign exchange market ahead of the MPC meeting,” said CBK governor Patrick Njoroge in a response to queries from the Business Daily.

The CBK is also wrestling with declining foreign exchange reserves, which serve as a cushion to the shilling.

At the start of the financial year in July, the reserves stood at $6.7 billion, but have since fallen by Sh31 billion ($300 million) as at last Thursday due to a variety of reasons, including selling to the market whenever demand requires it, repayment of debt as well as revaluation of the existing reserves.

Banking sources who spoke to the Business Daily said the industry had began to suspect that there was speculation on the currency, which the CBK may be keen to stop at an early stage.

“The governor has summoned us for a meeting tomorrow,” said the CEO of a commercial bank.

“The agenda is supposed to be the exchange rate, but I think it is more about speculation on the currency. The depreciation can no longer be justified by just looking at the fundamentals.”

READ: Weak shilling sends CBK back to the drawing board

The head of Treasury at a commercial bank said that the demand for forex was being driven by fear that it might soon be even more expensive to buy the dollar, so people were hoarding hard currencies.

“What people are trading on is the future. They don’t see a recovery in the value of the shilling. They only see it weakening, so they are trying to protect themselves by buying and depositing in their accounts well before the goods’ purchase date,” said the Treasury head.

Independent analysts also said that the statement by Zambian President Edgar Lungu that the country was considering intervention to change the direction of the currency value had contributed to the Kenyan shilling’s fall.

“The news that President Lungu is considering introducing forex controls is the last straw and what we are watching today is a degree of capitulation in sub-Saharan Africa as a result of the reaction to Lungu,” said Aly-Khan Satchu, an independent observer of financial markets running Nairobi-based advisory and data vending firm Rich Management.

Reuters quoted the Zambian government saying it could not allow the kwacha to continue its free fall when it was clear that the market was unable to fix the problem.

“The president cannot allow the national currency to collapse because of a false belief in a free market economy even when things are clear that the market won’t fix itself. So the president could intervene, through the Treasury, of course,” presidential spokesman Amos Chanda was quoted saying.

Analysts said that Dr Njoroge does not have a lot of choices on the actions to take, given the pressure also coming from the international currency market.

“The Central Bank governor is left with very few options. We are seeing a general sell-off across commodity, emerging and frontier currencies. We are actually out-performing the trajectory of that decline,” said Mr Satchu.

Dr Njoroge said that he normally held meetings with commercial banks one week after the MPC meeting. However, the latest meeting with bankers is being called two weeks before the MPC one ostensibly to inform the discussion during the upcoming meeting.

The financial markets are having to deal with reduced foreign exchange earnings as the value of exports falls while that of imports has been rising.

In the latest monthly report of the National Treasury, the value gap between imports and exports (captured under the current account deficit) widened further by 22.7 per cent to Sh623.2 billion as at May – showing an increase by Sh115 billion in a year.

The progressive deterioration of the export-import gap has eroded the value of the shilling, which has fallen a notch lower every month this year and is now just over 14 per cent weaker compared to the beginning of the year.

The shilling is also victim of the expected tightening of the financial markets once the United States Federal Reserve goes ahead with the increase in interest rates in the course of this year.

Some of the regional currencies, such as the Ugandan shilling, are performing worse than Kenya’s, although the concern of the markets in Kenya has to do with the pace of the recent weakening. Just a week ago, the currency was at Sh103 to the dollar, but has lost nearly another Sh3 in just a matter of days.