Kenya shilling’s free fall slows down on rising dollar inflows

The shilling has seen its rate of weakening against the dollar fall to its slowest pace since the beginning of the year, reflecting reduced demand and improved supply of dollars in the economy.

Central Bank of Kenya (CBK) data shows that the shilling has shed on average three cents to the dollar since the beginning of December, compared to an average loss of 12 cents a day in November, and 13 cents in October.

The stability has also filtered through to the retail market, where the dollar selling rate has held within the 150-160 units of the local currency since mid-August.

“We are seeing muted demand for dollars from businesses, as they ease activities towards the holiday season. On the supply side, there are sufficient flows, where we have seen improved (interbank) market efficiency,” a currency dealer in a commercial bank said.

A sample done on Monday on the rolling exchange rates in four tier one lenders –Equity Group, NCBA, I&M Bank, and Stanbic—showed quotes of between Sh157.85 and Sh158 on the selling side, and buying range of between Sh152.75 and Sh153 to the dollar.

On the sell side, the margin between what the banks are quoting and the CBK’s official rate has fallen to 4.56 units, down from 6.45 units in April.

Banks had at the beginning of the year struggled for dollar liquidity due to a stagnated interbank market, which also made it hard for the economy to discover the true value of the shilling.

Lenders were afraid of falling foul of strict CBK rules on daily rate movement, and trading dollars among themselves outside of the official rates.

Progressive talks between banks and CBK from March have seen a continued revival of the interbank dollar market in recent months, allowing for the narrowing of the spread between the rates on offer in banking halls and the CBK’s official rate.

CBK governor Kamau Thugge has also been calling into question the management of the shilling by his predecessor Patrick Njoroge, saying that the regulator’s interventions had the effect of keeping the shilling artificially strong at a time when it should have been depreciating in line with prevailing economic conditions in the country.

Last week, the CBK said that the shilling is now deemed to have depreciated more than is required to find its fair value, having shed 19.5 percent to the dollar since the beginning of the year.

The result of the higher-than-expected depreciation, according to Dr Thugge, has been a distortion of the country’s inflation and foreign debt.

The CBK thus raised its base rate by two percentage points to 12.5 percent in last week’s monetary policy committee meeting, hoping that the higher interest rates will attract foreign inflows that will prop up the shilling.

Dr Thugge also cautioned that should the rate increase fail to tame further depreciation, the CBK is ready to tighten monetary policy further down the road.

Source: Business Daily

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