The currency firmed this week, buoyed by a drop in importer demand for dollars and hard currency inflows. PHOTO | FILE |
NATION MEDIA GROUP
Opinion and Analysis
By JAINDI KISERO
In the conduct of monetary policy, there is nothing
more important than speaking plainly and clearly. I think that the
Monetary Policy Committee’s meeting of Wednesday this week did not do a
good job at giving the markets a clear picture on the trajectory of the
shilling.
The markets want a clear road map because our currency has
been experiencing the type of volatility we last saw in 2011. In
response to persistent pressure on the shilling, the Central Bank of
Kenya has been consistently releasing dollars into the markets.
However, this has not stopped the downward slide of the currency.
So, when the Monetary Policy Committee (MPC) met on
Wednesday, everybody expected to see some tightening of the monetary
policy stance.
As it turned out, the committee chose to retain the
Central Bank Rate at 8.5 per cent -- the same level it has been kept
since April 2013.
Whether this was an appropriate stance or not is a matter of opinion.
We must now wait to see how the markets will
respond. For me, I expected clear direction from the committee,
especially on the issue of forward guidance. I wanted a plain answer
from the MPC stating “This is why we did not increase interest rates.”
The plainer and clearer explanation- at least from the document they put out would have run as follows:
That by consistently injecting dollars into the
market in the past few weeks- selling dollars in exchange of shillings-
we have been indirectly sucking out liquidity from the market.
Already, you can see the impact of what has been
done on the short-term market, especially on the inter-bank where
interest rates have started trending upwards.
We expect the tight liquidity situation to start
reflecting on longer dated paper- especially Treasury bills and Treasury
bonds. With the yield on these shilling-denominated assets starting to
trend upwards, we expect the situation to start triggering dollar
inflows in the economy.
I expected the Monetary Policy Committee to explain
things simply. There are more reasons why the shilling should stabilise
in the medium term.
First, oil prices are expected to remain low.
Second, we are seeing increased dollar remittances. Third, we have $7
billion in foreign exchange reserves- equivalent to four and a half
months of import cover. Fourth, we have an IMF stand-by arrangement,
which we can resort to if the volatility in the exchange rate persists.
Clearly, explaining away the current pressures in
the market is not that difficult. But in the long term, the fundamentals
don’t look that good.
Our exporting sectors have been underperforming for several years. Indeed, exports to GDP have been flat for several decades.
Earnings from tea, coffee, tourism and horticulture have been
consistently low for long periods. The recent collapse of the tourism
industry has worsened the situation. On the other hand, the value and
quantity of imports has increased exponentially.
Indeed, the massive investment in infrastructure projects
which the government is undertaking has created a huge increase in the
demand for dollars due to infrastructure spending, notably imports of
steel and heavy machinery.
We are exporting massive amounts of dollars through
payments to Chinese contractors. The rapid increase in oil exploration
activities in northern Kenya – and the explosion in geothermal
exploration projects have also resulted in increased demand for dollars.
External factors have also come into play.
Internationally, the continued strong performance of the US economy and
the strengthening of the dollar continue to exert pressures on
currencies of all its trading partners, including Kenya.
Indeed, recent statistics now show that the US has
become the third principal source of imports into Kenya, Regionally, the
weak performance of our economy relative to member states of the East
Africa Community is also a factor.
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