Almost two years into the Covid-19 pandemic and the significant economic shock it has spawned, it is understandable that external balance assessments of different economies including Kenya’s have come back into sharp focus.
These assessments are important in determining the relative performance and misalignment of currencies and the resultant trade competitiveness across countries, more so, for economies such as Kenya’s, which are open and continue to integrate into the world economy.
In this regard, a raft of commentaries on the performance of the Kenya shilling have undoubtedly come to the fore in recent weeks. Indeed, the future direction of the exchange rate as well as related market stability concerns dominate a fair amount of conversations at industry forums lately.
However, most of the commentaries have not always provided the appropriate balanced analysis that showcases the remarkable stability that continues to be witnessed in Kenya’s foreign exchange market throughout the ongoing pandemic-driven macro-economic shock.
Across most metrics, the Kenyan foreign exchange market has demonstrated notable resilience and stability.
Undergirded by a strong prudential framework that guides daily foreign exchange dealing including market conduct, normal activity in the market has continued throughout the pandemic unperturbed and so far the banking industry continues to service all customer needs and commitments with relative ease.
Compared to its peers, the Kenya shilling continues to demonstrate relative competitiveness. Year-to- date, it has depreciated by a meagre three percent. In contrast, the Nigerian naira and South African rand have depreciated by four percent and seven per cent, respectively, even as other regional currencies continue to post mixed performance.
Typically, the movement of currencies either direction is to be expected from time to time as respective domestic objectives of fast growth with low inflation are pursued amidst a dynamic external environment. Actions by the US around the dollar itself can drive currency responses across the world.
Even as 2022 dawns and the path to Covid-19 “endemicity” remains predictably uncertain, it may be useful to take stock of how far the Kenyan foreign exchange market has travelled and perhaps offer thoughts on its potential path going forward. Such a reflection invariably bears out at least the following three key themes.
Firstly, the stability of the Kenyan foreign exchange market remains firmly anchored on sound prudential guidelines including principles of good market conduct that continue to inform dealings in the inter-bank market. Licensed foreign exchange dealers are bound by a model code of conduct through a self-regulating dealers’ association in firm consonance with international best practice.
Additionally, the foreign exchange market is well developed with strong infrastructure and institutional capacity supportive of all market micro-structure objectives including an effective price discovery mechanism; ensuring that the exchange rate is reflective of other macroeconomic fundamentals.
In addition, each bank has established foreign exchange risk management frameworks with net open positions tied to respective bank balance sheet strengths and capacity.
Secondly, and singularly pertinent is the fact that the foreign exchange markets’ resilience as well as the shilling’s relative competitiveness continues to be underpinned by a fairly decent balance of payment outcome despite the sharp contraction of output in 2020.
After an undesirable contraction in exports performance owing to the closure of destination markets at the peak of the pandemic that led to a slight widening of the country’s trade balance, Kenya is steadily fighting its way back with recovery in traditional exports.
Throughout the ongoing public health crisis, foreign exchange receipts have, against expectations, improved. Diaspora remittances have steadily grown averaging about USD 310 million per month.
Additionally, there have been improvements in the capital and financial flows including receipts from development partners such as the International Monetary Fund and the World Bank.
All considered thus, despite the magnitude of the Covid-19 macro-economic shock the country’s overall balance of payments position continues to demonstrate welcome stability.
Thirdly, and more fundamentally, it is obvious that the durability and stability of the foreign exchange market will remain predicated on the strength of the economic rebound in the short-term and the eventual success of the economic recovery strategy in an endemic Covid scenario in the medium-term.
Given the uncertainty around the exact path of the pandemic going forward, this is undoubtedly the most difficult theme to discern. Foreseeably though, the 2021 economic rebound appears strong anchored on a steady recovery of services riding on the back of better management of the public health risks through enhanced vaccination efforts.
As at half-year, economic output rebounded by about 5.3 percent.
This strong rebound, and its potential sustenance into 2022, provide the necessary anchor to long-term macroeconomic stability, conferring benefits on the internal and external balances with direct implications for the stability of the exchange rate.
No comments :
Post a Comment