I tend to avoid macro-economic analysis on this column because there is a whole constellation of macro-economists from banks to financial analysts doing it. Today, I delve in because there is a grave danger no one is willing to call it out, the Central Bank of Kenya (CBK) consistently operating with little transparency and accountability when such a regulator should be beyond reproach.
A Google search can provide a situational appraisal that CBK has a fundamental accountability flaw. First, in 2014 when taxpayers lost more than Sh20 billion in the National Youth Service (NYS) scandal, the CBK failed to flag and prevent the fictitious payments.
Later, one of the suspects implicated its Anti-Banking Fraud Unit as one of the gatekeepers that facilitated the money heist.
Second, CBK grossly failed to prudently supervise and regulate banks leading to the collapse of three banks due to fraud related practices. CBK top officials were later implicated as having received gifts from these banks and to-date no one has been held to account.
This failure was so pervasive that when the interest rate cap proposal came for public debate, CBK had no moral standing left to guide the discussion accordingly.
Third, then came the second NYS scandal where banks accused of handling the transactions said that they had red-flagged and notified the CBK about suspicious accounts but it never acted. Taxpayers this time lost more than Sh8 billion and no one at CBK has taken responsibility.
Now coming to the subject of discussion, two weeks ago IMF re-classified the Kenyan currency from “floating” to managed arrangement” because of CBK heavy intervention leading to the shilling being overvalued by about 17.5 percent.
In short, CBK has become a price fixer of the exchange rate, which it does with much secrecy. It doesn’t publish the FX operations like other emerging markets. It’s unfortunate that according to Bloomberg, which reported the story, CBK in response said that “the currency reflects its true and fundamental value.”
To debunk this, one just simply needs to check the standard gauge railway (SGR) investment. There has been minimal volatility movement and inflation pressure on the shilling. In fact, it has remained stable ranking fourth best-performing globally despite these huge SGR funds coming in that now total more than Sh550 billion.
Therefore, there shouldn’t be any contention that CBK is fixing a desired outcome of the exchange rate and failure to disclose FX operations shouldn’t be the licence to mislead the public. This “managed currency” policy by CBK resembles the policy attitude picked by US President Bush in 2008 when he said, “I have abandoned free-market principles to save the free-market system.”Now the bigger ramifications of CBK price-fixing the shilling is that it’s now practicing backdoor economic planning.
First, keeping foreign debt in check by maintain a stronger shilling against the dollar CBK has given Treasury space to accumulate more foreign loans creating a Ponzi-like scheme “if we can’t pay debts, let’s create space to borrow more and refinance.” And we are now seeing Treasury lining up another Sh280 billion in external loan before end of year.
If the shilling was freely floating, it would most likely be trading around 110 against dollar bulging our foreign debt portfolio leaving no room for further external borrowing. So CBK essentially eliminated the importance of the self-corrective mechanism within the exchange rate that would have forced Treasury to confront its foreign debt problem.
So, when did CBK become an appendage of the Treasury? At the same time, CBK is using reserves (public funds) to subsidise importers leading to exportation of jobs. In the world trade market, exchange rate is the price system of a country therefore overvaluing a currency makes your imports cheaper and exports expensive thus making them uncompetitive in the world export market.
So, for how long will CBK continue with its maladministration without being held accountable? And what policy position are they communicating by price-fixing the exchange rate?
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Note: The results are not exact but very close to the actual.
