CBK in a spotlight as shilling touches 100 mark to the dollar
Prof Njuguna Ndung’u: The CBK Governor. Has the Central Bank of Kenya (CBK) run out of instruments to hold the economy steady. File
Has the Central Bank of Kenya (CBK) run out of instruments to hold the economy steady?
This is the question that occupies the mind of most businesspeople as the week ends with the shilling ever more close to the Sh100 mark against the US dollar and pressure mounts on interest rates after last week’s increase in the benchmark Central Bank Rate (CBR).
All eyes were Thursday looking the CBK way for any signals that the volatility that has persisted in the currency market for the past three months is about to bottom out, leaving room for execution of a policy stance that can bring some certainty in the business environment.
“The level of volatility is such that it is no longer possible to plan or budget for anything, even in the short term,” said Shreyesh Patel, a Nairobi-based trader of motor vehicle parts, underlining the pain that businesspeople continue to bear. “It is unbelievable that we were budgeting for our next consignment of imports at the rate of Sh93 to the dollar and only seven days later that has shot up to Sh99.”
The CBK has particularly come under increasing scrutiny in the past few months that it has struggled to keep the shilling afloat, diffuse inflation and meet the government’s borrowing needs without jerking up interest rates. (Read: CBK faces tough choices in bid to stabilise shilling)
It has been seven weeks of nerve-racking experience for the business community as Njuguna Ndung’u, the Central Bank governor, who saw Kenya through the difficult post-election period and global economic crisis of 2008 with relative ease, has exhibited signs of fatigue with an unprecedented muddling through the monetary policy arena.
Signs that Prof Ndung’u was losing the grip on monetary affairs first emerged two months ago when he, together with the Monetary Policy Committee (MPC), decided to keep the benchmark CBR at 6.25 per cent against general expectation of rising inflation pressure – then already above 15 per cent – that required a tightening of monetary policy.
That decision left the government bond yield – the price that the Treasury paid to borrow money from the domestic market – at nine per cent, nearly three percentage points above the policy rate, creating huge arbitrage opportunities in the market.
Still in denial of the changes that had taken place in the market, Prof Ndungu’s answer to the predicament was a turn to ad hoc measures that saw the CBK publish the applicable rate for the overnight lending window on its website every morning. That decision alone caused so much turmoil in the money markets, forcing Prof Ndung’u to convene a special MPC meeting that ultimately decided to raise the CBR by 75 basis points -- a move that was expected to stabilise the exchange rate.
The failure of the MPC’s latest measures to bring an end to the turbulence in the monetary affairs is what has sent strong shockwaves across the economy. The shilling’s slide against major world currencies continued this week, taking the currency to Sh99.90 to the dollar by close of trading Thursday or 21 per cent lower since January — its lowest point since exchange rate controls were removed in 1994.
It has not helped that the Central Bank has lost grip on all key areas of its mandate, including the legally set level of forex reserves it is required to hold, and the inflation target.
The struggle to support the shilling has increasingly forced the CBK to use its dollar reserves in ad hoc market operations reducing the pile to 3.5 months worth of import cover against the four months required by law.
At the current rate of 16.67 per cent, headline inflation is way off the government set target of five per cent – and Prof Ndung’u has more recently revealed that even the core inflation at seven per cent is above the target inflation rate. (Read: High food, energy prices add impetus to inflation)
Anxiety over the state of the economy reached a crescendo on Wednesday as the Central Bank released Sh15.3 billion in the market to increase the supply of money as it offered Sh10.4 billion worth of bonds only to return to the same market hours later with dollars as the shilling tumbled to a new low of Sh97.50 to the dollar. Though the CBK has remained in the glare of light with these challenges, it is not entirely to blame for the mess.
The government has added to the difficulty of acute supply shortages in the economy that have increased pressure on the pricing of key commodities such as maizemeal and sugar with a huge budget deficit -- now at 7.5 per cent against a target of not more than five per cent.
This level of deficit has forced the Treasury to rely on domestic borrowing that has resulted in a huge increase of money supply. Ultimately, the economy has had an oversupply of shillings chasing the few dollars in the market – causing depreciation and inflation whose impact every Kenyan has had to deal with.
Economists said that ordinarily, a large fiscal deficit should not necessarily result in currency depreciation and high inflation but in the Kenyan case it came is underpinned by a huge current account deficit – a bigger value of imports than exports – as well as supply shocks.
“The problem with the exchange rate is basically that you have a big fiscal deficit and a current account deficit at the same time. That is what needs to be addressed,” said David Cowan, chief economist for Africa at Citigroup in London.
