Boost exports to stabilise shilling

The statement by the chairman of the Kenya Association of Manufacturers (KAM), Mucai Kunyiha, was terse. He charged that manufacturers seeking to import intermediate inputs were experiencing difficulty in accessing US dollars from local banks.

A crippling shortage of dollars, he added, had precipitated a parallel market where the greenback was trading at a huge premium above market rates.

Asked him to comment on the remarks of the chairman of the influential lobby, Central Bank of Kenya govenor Patrick Njoroge dismissively asked the reporters to direct their questions to KAM and to the ‘pink paper’ that had reported the story, scornfully describing some of the parties talking about shortages as mere ‘traders’ with no ‘positions’ in the foreign exchange business.

Secondly, he sneeringly told the manufacturers that their sector’s total weekly demand for dollars at under $100 million was but a small fraction of what the market is able to mobilise, pointing out that the local foreign exchange market generates and distributes $2 billion every month.

Was the governor right in answering the queries by reporters dismissively? I don’t know. But whichever way you look at the episode, it once again illustrated the challenges which central bankers have to confront when communicating monetary policy decisions in a context of speculative markets.

In 1981, Karl Brunner wrote that when it comes to communicating monetary policy decisions, central banking finds it impossible to articulate its insights in explicit and intelligent words and sentences.

That they will blow smoke — both literally and figuratively — ostensibly to pre-empt unfair speculation and to stem inappropriate market reaction.

Do we, really, have major shortages of dollars? Consider the following numbers from official statistics. In the 12 months to April 2022, remittances totalled $3.9 billion. Currently, CBK foreign exchange reserves stand at $8.1 billion, equivalent to 4.86 months of import cover. Has the interbank market collapsed? I choose not to shout fire in a crowded theatre.

What worries me is that very other player in the market I speak to appears to be in a self-fulfilling prophecy mode — predicting trouble for the shilling. For most dealers, it is a one-way bet. In the language of forex dealers, ‘you don’t try catching a falling knife’.

Dealers are literally running away from the local currency. Clearly, negative sentiment is a big factor in the current poor performance of the shilling in the market. Financial markets here do not go by fundamentals.

Like punters, they rely on guts and what their peers tell them in the marketplace or on the golf course. And, since positions are not taken on the basis of robust and serious analysis of fundamentals and trends in the macroeconomy, the money markets here are prone to panicky behaviour.

Right, now owners of dollars are taking positions under the assumption that there will not be enough dollars in the market in the medium term.

To reverse the trend, a major and bolder monetary policy intervention is unavoidable to temper market volatility in the medium term. Textbook theory teaches that when your currency is under pressure, you hike interest rates.

What is going to move investors back to Kenya in a significant way is a major upward movement on yield on Treasury Bills and bond.

Last week, the Monetary Policy Committee increased the policy rate from 7.0 percent to 7.5 per cent, signalling higher interest rates in the medium term.

The problem, however, is that adjustments to the policy rate take very long to transmit to Treasury bill and bond rates — the two instruments that international investors target.

It should not surprise if we start seeing the central bank start taking outlier bids in the auctions. Still, long term policy questions remain. Until we address our huge appetite for imports and start re invigorating the export sector, no amount of tinkering with monetary policy will stabilise the shilling on a sustainable basis.