Economy

Kamau Thugge: How former Central Bank governor bungled the Kenya shilling

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Former Central Bank of Kenya Governor Patrick Njoroge on December 1, 2022. PHOTO | LUCY WANJIRU | NMG

The Patrick Njoroge-led Central Bank of Kenya (CBK) burned $2.8 billion (Sh429 billion, at current exchange rate) worth of foreign exchange reserves to artificially prop up the shilling between 2020 and early 2023, undermining the country’s ability to cushion itself against the current bout of global shocks.

In another hard-hitting interview that has seen the new CBK boss take aim at his predecessor’s reign, Kamau Thugge poured cold water on Dr Njoroge’s management of the country’s foreign exchange policy in his eight-year stint that ended on June 17.

Dr Njoroge denied ever propping up the shilling and fought claims that there was a dollar shortage in an era that also saw analysts punished for commenting on the currency woes.

Read: How Patrick Njoroge sought to shift power to the customer

But on Tuesday, Dr Thugge said that his predecessor should have raised the benchmark rate a lot sooner and more decisively to stem the runaway depreciation of the shilling against the US dollar. He added the monetary policy is now behind the curve to rein in external pressures related to the weakening currency.

The free fall of the Kenyan unit is inflating the country’s debt by about Sh65 billion every month, in what has seen it account for more than two-thirds of the Sh1.2 trillion increase in the public debt stock.

The weak shilling added Sh809 billion to the public debt stock in the 12 months from July 2022, a report by the Parliamentary Budget Office (PBO) reveals.

While the government borrowed Sh310.76 billion from external financiers to fund the budget in the 2022/23 financial year, the external public debt stock increased by Sh1.12 trillion, a scenario the PBO attributes to the depreciation of the shilling against major currencies from which the country has borrowed against.

The shilling depreciated by more than 20 percent against both the US dollar and the Euro— the two currencies that constitute 87.6 percent of Kenya’s external debts— in the year to June.

The CBK’s monetary policy committee meeting on December 5 increased the benchmark rate by two percentage points to 12.5 percent, the highest point it has been in a decade. The benchmark rate was last at 12.0 percent in November 2012.

Dr Thugge said the shilling has now depreciated more than is required to find its fair value.

“The exchange rate has depreciated more than is required to establish an equilibrium and market determined stable and competitive rate. Where we are now is a situation where there is a lot of uncertainty and foreign investors are hesitant about coming in because they are not sure on where the exchange rate will settle,” the CBK governor said in a conversation with journalists.

Dr Thugge said Kenya will soon receive Sh46.0 billion of financing from the Trade Development Bank (TDB), which should help cushion the economy from exchange rate pressures. The Governor has allayed fears that the latest rate hike will adversely impact the stability of the banking sector.

“We are set to receive US$300.0 million in proceeds of a loan from the Trade Development Bank of East Africa within the first half of December 2023, which is part of US$500.0 million financing that we should be receiving from the Bank. We have done our stress tests and looked at the impact this hike will have on lending rates and mark-to-market securities and concluded that those costs are outweighed by the potential benefits of stabilising the exchange rate,” he said.

Read: A look at Njoroge's CBK tenure

The governor has raised concerns on the depreciating shilling, leading to the dollarisation of the economy. The CBK says the monetary policy committee raised the benchmark rate by 200.0 basis points to decisively deal with the issue of the exchange and to help bring inflation to the target mid-point of 5.0 percent.

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