Kamau Thugge: How we pulled the shilling back from the brink

BDL CBK Kamau r

CBK Governor, Kamau Thugge during an interview at his office along Haile Selassie Avenue, Nairobi on June 21, 2024. 

Photo credit: Wilfred Nyangaresi | Nation Media Group

Interventions in the inter-bank market, tightening of the benchmark interest rate, and the Eurobond buyback helped salvage a battered shilling and make it one of the best-performing currencies in the world this year, Central Bank of Kenya (CBK) Governor Kamau Thugge has revealed.

As of Monday, the shilling had rallied by close to 20 percent against the US dollar on a year-to-date basis, with the CBK quoting the exchange rate at Sh128.63 compared to a low of Sh160.75 on January 30.

According to Dr Thugge, CBK interventions to restore calm and stability to the exchange rate go back to his first days in office last June.

“When I came into office on June 19 last year, I found a situation where inflation was very high and outside our target band and there was significant pressure on the exchange rate. I had a meeting with bankers because I couldn’t understand why there was so much pressure and they were candid noting there were some reforms agreed upon but not implemented by the CBK,” he noted in an interview on Friday.

“After noting some of the demand pressures, including a backlog of people seeking to get foreign exchange, I called for a monetary policy committee meeting within one week and we agreed to raise the policy rate by 100 basis points (one percent) which was a surprise to the market.”

Interventions to steady the exchange rate have included allowing for an electronic trading system and lowering the minimum transaction recorded as a forex interbank deal from $500,000 (Sh64.2 million) to $100,000 (Sh12.8 million).

The CBK has also unified its quoted exchange rate with that of commercial banks, correcting a divergence in the rates as observed across 2023.

While most of the interventions occurred in Dr Thugge’s first few months in office, inflationary and currency pressures stuck throughout 2023, warranting a further rise in the policy rate to leave the Central Bank Rate at 13 percent in February this year from 9.5 percent in May last year.

Whereas the raise resulted in a positive real interest rate differential between Kenya and other economies, the exchange rate remained under pressure as speculation on a potential sovereign default became rife amid a looming and outsized Sh257.1 billion ($2 billion) maturity.

“Every day, we had the exchange rate depreciate. A lot of Kenyans saw this as an investment opportunity and saw dollars as an asset because it would appreciate every month and they would get more shillings for it. We needed to find a way to break that speculative element,” Dr Thugge said.

Subsequently, in February, the CBK took a double-barrelled approach to quelling speculation beginning with the partial Sh192.8 billion ($1.5 billion) buyback of the sovereign bond notes maturing in June.

The buyback helped clear the uncertainty of default. CBK followed the act with the issuance of a new infrastructure bond just after the buyback which attracted heavy foreign investor participation yielding in new Forex inflows.

The shilling has since February staged a comeback that has seen the exchange rate gaining by more than 32 units/Sh32 since its lowest point at the end of January.

The recovery which has instilled faith once more in the domestic foreign exchange market has been definitive to Dr Thugge’s first term in office and presents a proverbial summary of his highest achievement so far.

In May, the Governor was named the Central Banker of the Year by the African Banker Magazine, which highlighted his achievements in stabilizing markets and instilling confidence in the Kenyan economy.

Other interventions by the CBK during the period have included the removal of a 20 cents limit on bid-ask spreads in the interbank foreign exchange market allowing for price discovery and transparency.

Going forward, Dr Thugge expects the Kenyan shilling to continue finding stability from a narrowed current account deficit- which largely dictates the difference between imports and exports and from sustained foreign inflows including higher diaspora remittances and disbursements from lenders such as the World Bank and the IMF.

The CBK notes that it has not undertaken any interventions in the exchange rate market in recent months as it allows the rate to be determined by market forces.

“It’s difficult to say whether we are at equilibrium. What we are trying to have is a market-determined exchange rate that will respond to what’s happening in the current and financial accounts. If the rate needs to incentivize exports, it should be able to depreciate but this should happen in a way that is sustainable and non-disruptive,” Dr Thugge added.

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.