Njoroge says banks partly to blame for shilling’s woes

Money Markets

Central Bank of Kenya Governor Patrick Njoroge during his inaugural Press conference at the bank’s headquarters in Nairobi on September 29, 2015. PHOTO | SALATON NJAU  

By GEORGE NGIGI, gngigi@ke.nationmedia.com

In Summary

• CBK governor Patrick Njoroge on Tuesday said he had tightened oversight over currency dealers to stamp out indiscipline after noting that movement of the shilling was being driven by release of inaccurate information into the market.

Dr Njoroge said he had tightened oversight over currency dealers to stamp out indiscipline after noting that movement of the shilling was not purely a factor of demand and supply of the dollar but was also being driven by release of inaccurate information into the market.

“Occasionally, we saw the shilling moving not because of supply and demand but rather because information was not evenly shared,” the governor said during his inaugural Press briefing since he assumed office in June.

"You would, for instance, hear that there is a large demand of $30 million dollars only for the figure to rise to $120 million an hour later and they are acting as if it is at $120 million – and yet there has been an echo of the $30 million that pushes people in a certain direction,” he added.

Dr Njoroge also criticised analysts who predicted the position of the shilling, arguing that some did not have facts to back their predictions and only canvass projections that advance their position in the market.

“You have an analyst out there who mentions that he expects the exchange rate to hit a particular level, which leads to certain behaviour that ensures fulfilment of the expectations,” the governor said.

Analysts have more recently been overly cautious when talking to the media in fear of repercussions from the regulator.

The shilling has lost 16.3 per cent to the dollar since the beginning of the year to trade at the current rate of Sh105 to the greenback.

The CBK also said it was working with the Treasury towards improved fiscal prudence to support its monetary policy actions.

The Treasury has been pumping cash into the economy through large infrastructural projects negating the CBK’s efforts to mop up liquidity in support of the shilling.

READ: IMF signs off Sh8bn to help stabilise the shilling

The CBK said it expects the shilling to receive support from increased inflows from tourism, which is expected to rebound in the last quarter of the year following withdrawal of travel advisories issued earlier by key source markets such as the US and Britain.

“The September Monetary Policy Committee (MPC) survey showed expected recovery in the tourism sector with forward bookings in major tourist hotels in Nairobi and Mombasa above 50 per cent on average,” reads a recent MPC statement.

The CBK also noted that importation of consumer goods had declined, shielding the country from imported inflation. Dr Njoroge faulted expectations of higher inflation rates, arguing that the trend has been on the decline with room for further drop.

“The MPC does not believe that the inflation expectations have fallen even when we have seen it falling so there is still a lot of hype and bad analysis,” he said.

The CBK’s foreign reserves recently fell below the statutory four months import cover in the wake of the CBK’s increased intervention in the open market - selling of dollars to support the shilling.

The bank, however, maintains that the current import cover of 3.8 months continues to provide an adequate buffer against short term shocks.

Besides, Dr Njoroge said, Kenya has at its disposal a precautionary credit facility from the International Monetary Fund it can use to shield the shilling from external shocks.

Speculative trading by dealers had been faulted for the plummeting of the shilling in 2011 to lows of Sh107 to the dollar.

CBK was forced to introduce stringent trading guidelines to curb the habit. In July, the governor issued a circular reminding the dealers of their trading limits, underlining the belief that the shilling was under deliberate attack.

Early this month, he summoned chief executives of commercial banks to persuade them to rein in their dealers in the currency market.

A rise in interest rates by the United States, however, remains a risk for the shilling.

Dr Njoroge said governors from emerging and frontier markets will next month, in a conference converged by IMF and World Bank, be urging the US federal reserve to be aware of the consequences such a hike would have in their economies.