Demonetization effects filter into value of Kenyan shilling


Demonetization effects filter into value of Kenyan shilling

In Summary

  • The Kenya shilling value has continued its recent slide against the US dollar breaching the Ksh.102 mark for only a second time this year signalling renewed concerns to the wellness of the local unit.
  • While the weighty Forex activity may represent an early indication to the infiltration of illicit financial flows into the formal banking channel, the cracking whip of the Central Bank is expected to keep financial services in line ensuring of the directive’s effectiveness.
  • The Central Bank of Kenya has in its hold tools to alleviate any volatility concerns including the hiking of the CBR in its July meeting, the floating of new government securities and the increase of commercial banks reserve-requirements.

The value of the Kenyan shilling has continued its recent slide against the US dollar breaching the Ksh.102 mark for only a second time this year, signalling renewed concerns to the wellness of the local unit.

The shilling which, for instance, averaged Ksh.102.00 to the green buck at the close of trading on Monday, remained unchanged early Tuesday owing to increased market liquidity according to reporting by Reuters.

While the excess money supply is partly attributable to increased flows from the ongoing dividend-payout season, Standard Chartered Africa Strategy Associate Eva Wanjiku ascribes the retreating shilling to an increase in the conversion of the local unit to US dollar denominated parts.

“It’s still early days but if we continue to see persistent weakness in the Kenya shilling even after the seasonality effects have gone through, then that could reflect on the increased conversions under demonetization,” she said.

Inflation

Wanjiku links increased US dollar conversions to misplaced inflationary fears which she says have led many of the old-series Ksh.1000 note holders to take refuge in green buck, employing the investment as a hedge against perceived domestic volatility.

“There is fear of an inflationary component given the large denomination of money in supply by the Ksh.1000 note where one may choose to take shelter in foreign currency,” she added.

Unlike India, the Central Bank of Kenya (CBK) has been keen to ease concerns on inflation projecting the Consumer Price Index (CPI) measured rate to hold within the 2.5-7.5 range in the near term.

The country’s inflation for instance eased to 5.5 percent in May even as consumer prices remained under pressure from the sustained high-prices of food essentials and crude landing costs.

CBK whip-cracking

While the weighty Forex activity may represent an early indication to the infiltration of illicit financial flows into the formal banking channel, PKF Partner David Kabeberi expects the cracking of the whip by CBK to keep financial services in line ensuring the directive’s effectiveness.

According to Kabeberi, the sector regulator is likely to nip any potential attempts at the bypassing of the old-series note exchange in the bud through its far reaching installed capacities.

“Certainly there will be attempts but we are already seeing an effective ban in the use of the Kenyan shilling in both Uganda and Tanzania. Foreign exchange movements can be dealt with later on as the pressing matter at hand is the curbing of illicit flows, this will in the end determine the directive’s effectiveness,” he said.

Kabeberi further expects exchanges to fear the wrath of Governor Patrick Njoroge who has in the past put up an uncompromising front in the face of breaches to the financial sector regulations.

5 commercial banks were for instance on the end of Njoroge’s displeasure in 2018, incurring fines totaling Ksh.394 million for handling corruption proceeds from the National Youth Service graft probe amounting to Ksh.3.6 billion.

Chase Bank, Imperial and Dubai Bank had early in Njoroge’s term fallen into the regulator’s jaws to all end up in receivership over unsafe and illegal banking practices.

Intervention

The Kenyan shilling has against all odds remained relatively unshaken against a strengthening dollar in comparison to its continental peers supported largely by sustained foreign currency inflows from exports and remittances with the monthly import cover hitting a high of Ksh.1 trillion in May or an equivalent 6.4 months import cover.

The position is further expected to hold this as the US Federal Reserve which begun its 2-day monetary policy meeting on Tuesday is anticipated to cut interest rates owing to a deteriorating economic outlook against a darkening all out trade-war with China.

Irrespective of the outcome from the Fed, CBK has in its hold tools to alleviate any volatility concerns including the hiking of the Central Bank Rate (CBR) in its July meeting, the floating of new government securities and the increase of commercial bank reserve-requirements.

In view of expectations for short-lived volatility, Wanjiku expects the execution of repurchasing agreements (repos) with banks on treasury instruments to hedge against impending shocks.

“The Central Bank always tend to intervene in the midst of volatility, the repo would be a useful tool in mopping up excess liquidity from the economy which may be contributing to some weakness in the market,” she said

Excess liquidity in the financial sector has already been signaled by a falling inter-bank rate which touched a low 3.05 percent on Monday.

A repurchasing scheme by the CBK makes up for an attractive offer to ease on any pressures on the shilling with the repo rate as of May 13, 2019 quoted at 0 percent.

The reverse-repo rate which describes the settlement to investors from the short-term credit arrangement however sits a higher rate of 9.2 percent an equivalent settlement to the purchase of a 364-day treasury bill.

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