CBK Governor Patrick Njoroge. FILE PHOTO | NMG
"Houston, we have a problem." This is what astronauts on the Apollo 13 Mission radioing mission control before an onboard explosion said.
Now, "CBK, we have a problem" is the rallying call we should be using to draw attention to our impending explosion. Trouble is brewing before our very eyes. Since the effects of the Covid-19 pandemic hit the economy, the Kenya shilling has been on a steady decline and the central bank managing it is now a wild goose chase.
Last week, Jibran Qureshi an economist heading the research unit of Standard Bank Africa, published an illuminating research note on Kenya's foreign exchange market. For a few months now, there has been a growing divergence between the official exchange rate and the actual interbank rate. The official exchange rate mainly channels the transaction of the public sector whilst the actual interbank rate reflects the market forces.
He explains this divergence as a price discovery phenomenon, which always happens in restricted markets, as an issue where the CBK has not been increasing supply of US dollars to manage the growing demand for it. This has led to the exchange rate finding its own price determined by market forces against the official rate, thus the decline of the exchange rate. Jibran's comment is a simple economics argument about how markets behave theoretically and now happening practically.
The CBK instead decided to join the conversation not with a pen but a hammer. The local subsidiary of Standard Bank Africa, Stanbic Bank Kenya, found itself in the crosshairs of the central bank because of Jibran's comments and had to distance itself from the conversation.
This reaction was not surprising though. The CBK for a period of time now seems to have adopted vigilante tactics of shutting down any commentary on the shilling it disagrees with instead of improving its argument.
In April this year the CBK accused Absa Bank Kenya of flouting several regulations in a forex trading. According to the CBK, Absa Bank had failed to provide information about specific foreign exchange trades that it conducted or ensure the standard checks on anti-money laundering and combating the financing terrorism (AML/CFT) and Know Your Customer (KYC) requirements were applied.
In its defence, Absa said that they were executing the transaction on behalf of highly reputable global financial institutions which are regulated in line with international best practice.
So, in short, Absa was calling out the CBK charge of Know-Your Customer requirement accusation as baseless. But the crux of this story comes in here; the CBK penalised Absa a month later saying it found Absa to have flouted the AML/CFT rules. The question is, if Absa was about to launder money, meaning they were about to commit a crime since money laundering is a crime in Kenya, why did the CBK not forward the case to investigative authorities?
The whispers out there were that the CBK was simply blocking the huge transaction to protect the weakening shilling which was at 106 at the time, and releasing that statement on Absa penalties a month later was to read the riot act to the banking industry.
Now, the CBK may go after everyone who comments about the shilling, but it shouldn't bury its head in the sand. The dual forex market stands to be a big problem if it does not wake up to the reality. We are looking at the possibility of a well-developed and organised parallel market taking shape, substantially depreciating more than the official rate, given the country's deficit numbers and constraint reserves and borrowing capacity to satisfy demand when the USD liquidity crunch becomes widespread.
A well-developed parallel exchange rate is an Achilles heels this economy can't afford because of the liberalisation and stabilisation efforts that will have to be mobilised.
The CBK should stop the vigilantism and start addressing the dual exchange rate problem that is developing without many sideshows.
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