RIP to the Kenyan Shilling

Death to KES

For the larger part of this year, the Central Bank of Kenya has ignored entreaties that it intervene to stabilise the shilling. Now when it appears that the shilling is in free fall, the CBK has belatedly moved in with a desperate effort to shore up the currency. It proposes selling foreign currency directly to key targeted sectors, starting with oil importers, who would thereby by-pass the rates charged by commercial banks.
                                                             

From Tuesday’s trading alone, it appears the intervention is bearing fruit as the market reported a modest gain in the shilling. However, it is a policy that must be approached with extreme caution, for what it does is to ignore market fundamentals and establish a parallel forex window.

On a simplistic level, that might appear reasonable given that the free market has not spared the shilling from free fall, and has, in fact, been exploited by banks and other speculators to make windfall profits at the expense of the national economy.

Such a solution, however, can be extremely dangerous. It basically means that those so favored can buy dollars at preferential rates from the Central Bank, and release the same to the market at handsome profits.

There are simply no safeguards to ensure that CBK dollars will be sold only to bona fide importers and that each dollar released at special rates will go towards its intended purpose.

Meanwhile the shilling’s crossing the psychological Sh100 to the dollar mark, with analysts projecting the slide to hit Sh110/120 in days, is not something to be ignored. What has set in is a sense of helplessness, with neither the Treasury nor the Central Bank offering any leadership. The message being sent is that the two are equally lost as to the cause of the problem.

The Euro debt crisis has been advanced as the main cause. While this could be partly true, it does not explain why the shilling has today become the world’s worst performing currency.

On Tuesday, for the second time, the CBK accused commercial banks of hoarding dollars in order to push the shilling further downwards, and thus make a killing in forex income.If, indeed, profiteers are exploiting the system in a manner that reeks of economic sabotage and the CBK is helpless, then maybe an enquiry from another organ is called for. If speculators are hoarding dollars for selfish purposes, then the forex trading environment must be reviewed.

Ordinarily, it is within the purview of the Central Bank to regulate the market unless it wants to be in dereliction of duty so that a few may prosper while the country bleeds. Any intervention, however, must not make a bad situation worse.

We have in this country a long history of schemes seemingly implemented to help the economy, but which turn out designed to help powerful political forces loot the public purse. Any programme aimed at stabilizing the shilling, however well-meant, must be rethought if it is so clearly open to abuse. Differential pricing could not work with maize-meal; it won’t work with foreign exchange either. 

Adapted from Daily Nation