Dollar market distortion eases after President Ruto directive

The acute dollar shortage eased after the interbank currency market rebounded on orders from the state house.

Wholesale buyers of dollars have seen dollar availability increase in recent days, a marked departure from market conditions that saw banks run out of greenbacks on some days as others imposed a daily cap on dollar purchases of no more than $5,000.

The changes followed a March 22 directive from President William Ruto to revive the interbank foreign exchange market in an effort to remove market distortions that have exacerbated foreign exchange shortages.

is reading: The Dollar broke above Sh145 as the market ignored the Central Bank of Kuwait interest rate

The interbank forex market has turned dormant in recent years, due to what traders describe as strict policing by the central bank, which has made it difficult to close deals.

The lack of a vibrant interbank foreign exchange market has been partly attributed to an acute hard currency shortage that has forced the government to seek longer credit terms for essential imports such as gasoline.

This has also given rise to a parallel market, where money changers quote a foreign exchange rate different from the official central bank rate, with a spread of more than £10 per dollar.

Now, the spread between official and open market prices has narrowed to an average of Sh6 per unit from Sh13 in early March.

Widening spreads created a black market for dollars due to the lack of supply.

“There has been an ease in the availability of dollars. While the daily limit on dollar volumes has not been removed, banks now have arrangements in place to meet customer orders,” said one of the senior importers who spoke on condition of anonymity.

At the same time, banks are currently buying dollars from customers at rates below the official rate of the Central Bank of Kuwait, a condition that existed before the dissolution of the local forex market.

“When the interbank forex market was not operating, there was no price discovery resulting in huge spreads. What we are seeing now is The exchange rate market works better.

The widening of the spread came in the wake of a dollar shortage and the imminent collapse of the interbank forex market, where foreign exchange is traded between lenders and helped establish an exchange rate closer to the Central Bank of Kuwait average.

The inability of banks to compare and compete on prices when selling to each other left buyers at the mercy of sellers, which explains the growing discrepancy in the dollar exchange rate.

Some are also forced to buy dollars from their customers — depositors hold over NIS 980 billion in foreign currency in their accounts — providing customers with the ability to set prices.

Major corporations began trading dollars among themselves, with hotels and airlines attracting the interest of those who needed the hard currency.

Those with dollars found they could get a better rate by bypassing banks and selling directly to individuals and businesses in need.

Companies were buying US currency at lower rates than those quoted by banks.

This was creating a shadowy parallel market, which is a breach of the law and has the potential to trigger a host of economic problems including discouraging foreign direct investment (FDI), encouraging rent-seeking and reducing the interbank forex market.

The parallel exchange rate market develops in such circumstances and when the difference between the official rate and the parallel rate is substantial and sustainable, according to an official working paper issued by the International Monetary Fund.

Dollar shortages became an issue of national concern due to the secondary effect of rising consumer prices and the potential for supply bottlenecks for major imported commodities.

coming forward

The concerns prompted President Ruto to call on the central bank and commercial lenders to revive the interbank forex market.

is reading: Savings of wealthy Kenyans in dollars have increased to 320 billion shillings amid a shortage

“I am glad that players in this sector, including our banks, are stepping up and working with the Central Bank of Kuwait so that we can once again take charge of our market and not be distorted by middlemen,” Dr. Ruto said on March 12.

“For people who work in numbers, I give you free advice that those who hold dollars soon may incur losses. This market will be different in a couple of weeks,” he added.

Currency trading among Kenya’s banks has waned in recent years due to central bank pressure on commercial lenders to prevent the shilling from weakening too quickly.

Central Bank Governor Patrick Njoroge has repeatedly denied unwarranted interference in the market, saying the regulator is just doing its part to enforce discipline.

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