Firms caught stockpiling dollars beyond ‘reasonable’ needs face fines of up to Sh10 million in proposals that seek to stamp out the hoarding of hard currency as the Kenyan shilling depreciates towards the 155 mark.
A draft Bill sponsored by Rongo MP Paul Abuor seeks to criminalise forex hoarding, defined as the accumulation of foreign currency for speculative purposes beyond ‘reasonable’ needs.
It, however, does not properly define what constitutes ‘reasonable’ needs.
Persons found guilty of hoarding dollars for reasons excluding meeting import requirements and travel allowances face fines of up to Sh1 million or an imprisonment term not exceeding 10 years.
Businesses and other organisations found culpable face fines of up to Sh10 million and the potential revocation of licences.
“The purpose of the Bill is to put [in place] measures to combat hoarding and to offer support for the Kenyan shilling so that it does not slide further against foreign currencies, particularly the US dollar,” Mr Abuor said on Wednesday.
“Evidence suggests hoarding for speculation purposes and a lack of faith in the Kenyan economy because of the country’s current economic headwinds, most notably, excessive debt financing,” he added.
31 percent depreciation
The mooting of the Bill comes as the local unit has shed 20.3 percent of its value against the greenback since the start of the year and by more than 31 percent since the beginning of 2022.
On Tuesday, the Central Bank of Kenya (CBK) quoted the shilling at 148.45 against the US dollar, a sharp drop from the 123.31 exchange rate at the end of December last year.
Some commercial banks are, however, selling a dollar for as much as Sh155, with the retail rate with Bank of Africa, for instance, selling the hard currency at Sh156.85 on Wednesday.
The shilling’s recent rout was blamed on the stockpiling of dollars by individuals and businesses in anticipation that the local unit would lose further ground against the greenback and other major world currencies.
There has been an increase in the stockpiling of foreign hard currency deposits, which stood at an all-time high of Sh1.248 trillion at the end of July.
Concerns over the shilling’s stability forced the CBK to intervene in March through several measures, including re-opening the foreign exchange inter-bank market and issuing a forex code to guide hard currency transactions.
Government-to-government deal
Other measures the financial regulator took to ease the pressure on the shilling include the government-to-government deal on the importation of fuel products earlier in the year, which was meant to lessen demand for dollars by enabling payments on oil shipments in local currency.
The deal saw President William Ruto talk up prospects of the local shilling, forecasting the currency would rally to about 120 against the US dollar.
While the local unit’s volatility has eased in the intervening period, the shilling is still down from the 135.91 exchange rate at the end of April.
This is despite an improved balance of payment, primarily anchored by reduced imports and robust exports alongside increased inflows from diaspora remittances.
On Wednesday, CBK Governor Kamau Thugge noted that the shilling’s woes were essentially a factor of monetary policy tightening in advanced economies.
He said he expects recent policy interventions, including improved projections on fiscal consolidation, to ease the currency’s depreciation.
Regulation takeover
“All currencies globally have depreciated, not just the Kenyan shilling and part of the depreciation has come from portfolio outflows. Going forward, taking into account our actions, we should see less pressure on the exchange rate,” Dr Thugge projected.
The Draft 2023 Forex Hoarding Criminalisation Bill nevertheless intends to take away CBK’s role in overseeing the forex market by establishing a new entity known as the Forex Management Authority.
The entity shall be a semi-autonomous regulatory body under the National Treasury. It shall be tasked with regulating and supervising the activities of market participants, including forex brokers, dealers, and other relevant entities to ensure integrity, transparency, and stability of the foreign exchange market.
The Forex Management Authority shall license, regulate, and supervise forex brokers and dealers, monitor compliance with applicable laws, and investigate and enforce penalties for violations or malpractices in the forex market.
The move will likely draw the pushback of the CBK, which previously likened the proposal to establish a new authority to protect banking sector consumers to trading a well-serviced SUV for a souped-up Subaru.
The Forex Hoarding Criminalisation Bill plans to grant individuals and entities hoarding forex an amnesty of three months/90 days, after which the amounts must be converted into Kenyan shillings or attract tax at 15 percent.
Further, the Bill provides a whistleblower provision where persons reporting forex hoarding activities in good faith shall be protected from retaliation and be entitled to 10 percent of the amount involved.
Analysts remain sceptic
Despite multiple interventions to stabilise the country’s forex exchange, analysts have tipped the shilling to weaken further before the end of the year citing lower foreign exchange inflows and higher global interest rates.
Last month, Stears, an African-centred finance and advisory firm, said low forex inflows and high global rates would lead to increased import costs and higher debt service costs for dollar-denominated loans.
“The Kenyan shilling is expected to trade within the range of 146 to 152 per US dollar in the coming weeks. The confluence of lower forex inflows and the US Fed tightening monetary policy has put significant pressure on the unit,” the firm noted.
Analysts at EFG Hermes meanwhile see the local unit’s official rate at Sh155 by year-end.
“The shilling has been weakening for nearly three and a half years now. We think further weakness is warranted considering the widening current account deficit, thin FX buffers, and global monetary tightening,” Abou Basha, EFG Hermes Lead Economist, noted in a previous interview.
