Editorials

Avoid dollar shortage panic

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The Central Bank of Kenya (CBK) has directed commercial banks to ration dollars following a shortage of the US currency and the race to protect reserves, hitting manufacturers and importers of goods hard.

The situation is compounded by the weakening of the shilling against the dollar. The shilling has fallen to Sh115.59 units to the dollar from Sh104.44 at the end of March 2020, which means that it is costing companies a lot more to buy forex.

The shortages and currency depreciation have pushed firms to hedge against further weakening by speculating, stocking up on dollars or holding on tightly to their greenback reserves as both the demand and supply side of the market read scarcity.

Limits on banks also risk creating a dollar black-market trading out of the control of the CBK, further hurting the Kenyan currency.

The CBK has maintained it lets demand and supply determine the direction of the currency only intervening to reduce volatility.

The regulator, however, needs policy credibility to calm the market and give assurance that the dollars are readily available even if it means at a higher cost rather than trigger panic, especially among foreign investors.