Shuttle diplomacy that rescued the shilling


Central Bank of Kenya Deputy Governor, Dr Susan Koech on February 28, 2023. PHOTO | LUCY WANJIRU | NMG

Senior bankers held a flurry of meetings with the Central Bank of Kenya (CBK) two weeks ago to revive the interbank forex market after the shilling neared a historic low of 150 units to the dollar amid State concern over external debt service costs and public unease on inflation.

The interbank market, which is the window through which banks trade dollars with each other on wholesale, had been effectively inactive for nearly two years as banks withdrew out of fear of offending the regulator’s tough rules.

The CBK’s tight control due to suspicions some players were manipulating the market had been identified by the industry as one of the reasons for the reluctance of banks to trade dollars with each other.

This saw the spread between the buying and selling price for dollars widen, as well as that between the CBK’s official printed rate and the retail rate for dollar buyers in banking halls as the price discovery mechanism got lost.

Ideally, it is the interbank market that helps in price discovery in the forex market, based on the visibility by all banks of the offer and asking prices that are put out when selling or buying forex from each other.

Bank executives who spoke to the Business Daily said that the loss of trust between themselves, and the regulator had made it difficult for a consensus on reopening the market even when it became clear that the closure was distorting the forex market.

Amid increased interest in the matter by the government, a number of meetings were arranged from the week starting March 13, coinciding with the arrival of the new CBK Deputy Governor Susan Koech, with who the lenders then sought to engage on the matter.

During her vetting before Parliament, Dr Koech had told MPs she would seek to put in place a functional and vibrant interbank forex market if she were approved for the role.

By the end of the week (March 17), the lenders had thrashed out a broad consensus to reopen the trading lines the following Monday, which halted the shilling’s recent sharp depreciation against the dollar.

“The reopened lines of communication have helped improve the volume of dollars to the market, and moderated the rates, which banks started posting on the trading board once again,” said a banker who was privy to the meetings, which have continued to date.

By Monday, the spread between the buying and selling prices for banks in the interbank market stood at about Sh2.40—at Sh131.60/Sh134 on the buy and sell side.

During the period the interbank market was not functioning, banks quoted the rate at which they were buying the dollar in line with that of the CBK official rate to avoid regulatory reprimand, but on the sell, sides were charging each other — and customers— a margin of up to Sh16 above the official rate.

The divergence and unbalanced dollar supply prompted the government to step in to try to restore sanity to the market, as it was now threatening the imports of key commodities such as fuel and hitting Kenyan consumers with imported inflation on household goods.

This saw the State negotiate a deal with Saudi Arabia and the UAE to allow imports of fuel on credit, which is expected to ease the monthly demand of about $500 million from the market by oil marketers.

On the supply side, the government is looking at the return to normalcy in the interbank market as the key to unlocking the hoarding of dollars by depositors, who by the end of December held Sh921 billion worth of hard currency in their accounts.

The reluctance by large depositors to release dollars to the market in recent months has partly been informed by fears that they would not in turn be able to access the greenback easily when their need came up, as well as suffering exchange losses when buying back the dollar given the depreciating shilling.

Others were holding out for capital gains due to the weakening of the shilling.

In a bid to push the depositors to sell dollars to the market, President William Ruto last week warned that those holding on to their dollars would be looking at losses within two weeks, following the resumption of the interbank market.

The CBK is also eyeing a stronger forex buffer with which to defend the shilling from expected inflows from a $1 billion World Bank loan that is expected to hit government coffers within the next two or three weeks.

The first consignment of fuel under the credit purchase scheme is also set for arrival next month, meaning that the market will get a breather from the sharp demand by oil marketers that would normally have been expected to weigh on the shilling by the end of March.

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