currencies
The shilling breaks through 140 to a dollar as new central bank chief Kamau Thug takes charge
Tuesday, June 20, 2023
New Central Bank of Kenya Governor Kamau Thug (right) and outgoing Governor Patrick Njoroge during the handover ceremony on June 19, 2023. Photo | Swimming pool
The Kenyan shilling breached the 140-unit trading mark against the US dollar, defying state interventions to stop the downward spiral, in the first major test for new Central Bank of Kenya President Kamau Thug.
Dr. Thuj assumed the position of the 10th central bank governor on Monday.
The continued slide of the local currency, which has so far lost 13.5 percent of its value since the start of the year, has challenged the Central Bank of Kuwait’s foreign exchange law that came with tough penalties against dealers caught manipulating the forex market, and a government-backed deal to import fuel by credit.
The market will now be watching for new tricks that Dr. Thug, who served as IMF mission chief in Botswana and Lesotho in the aftermath of the global financial crisis, will pull from his bag to stem the slide.
The shilling first crossed the 140-unit mark last Friday, according to printed official exchange rates, and continued its downward spiral on Monday, punishing a bullish US dollar globally. The depreciation indicates growing demand, mismatches in supply and the pressure building up over the rising cost of living crisis in an economy that is largely dependent on imports.
Analysis of the official printed exchange rate shows that the shilling has fallen by around 7.21 percent since the regulator, the Central Bank of Kuwait, imposed a law it pledged would ensure the integrity and efficient functioning of the relatively volatile forex market.
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The currency has also fallen 3.93 percent of its value since April 18 when the first shipment of petroleum products purchased on six-month credit from Saudi Arabia and the United Arab Emirates landed at the port of Mombasa.
President William Ruto had supported the government-to-government import deal, which enables oil marketers to buy fuel in shillings, along with the regulator’s action, to ease demand for dollars and support the local currency.
The law, which was implemented on March 22, prohibits banks from engaging in trading or bidding practices or conducting transactions with the intent of manipulating price movements or disrupting the functioning of the market.
Dr. Ruto said last month that his administration had curbed the widening of the spread in the forex market, accusing his predecessor’s administration of presiding over an artificial exchange rate market that led to an acute shortage of dollars and hit major commodity sources from abroad. like fuel.
“There were two parallel rates. There was a dollar by the government that they said was 120 shillings and there was another dollar. If you really want to go and get dollars, you should really go and get them at 128 or thereabouts,” Dr. Ruto said in a post. Media on May 14.
“We have brought back the interbank forex market. The spread that was from Sh12 to Sh15. That has narrowed down to between Sh2 and Sh3.”
With an official average rate of 140.04 units per dollar last Friday, the shilling lost 13.51 percent of its value against the dollar since the beginning of the year, after closing at 123.37 at the end of last year. This is the sharpest slip compared to 3.76 percent in the same period last year, which indicates a mismatch gap in supply and demand for the dollar. The rate in the retail market is even higher, with most top-tier banks selling dollars for more than 146 shillings in bank halls and buying them for about 137 Kenyan shillings – a spread of about 10 shillings.
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Continued weakness of the shilling makes imports more expensive and puts pressure on the cost of living due to the country’s dependence on foreign markets for essential supplies such as fuel and materials for factories.
Consumers are already feeling the impact of the shilling’s depreciation after purchase prices rose the fastest in more than half a year. Firms surveyed in the May composite PMI linked higher consumer prices in part to a weaker shilling, which sent input prices rising at the steepest pace since January 2014.
“Input prices are now at their highest levels since the survey began in 2014 as the value of the shilling (KES) has depreciated further, driving up import costs,” wrote Mullalo Madula, an economist at South Africa-based Standard Bank, the parent company of Stanbic Bank. In the PMI on June 6.
“This caused the largest increase in output prices in seven months – but it was less than the associated increase in input prices.”
This is happening after Kenya’s foreign exchange reserves rose to more than four months’ worth of imports for the first time in six months after the World Bank sent a $1 billion loan. The reserves amounted to $7.459 billion (about 1.04 trillion shillings, where 1 dollar equals 140.04 shillings) last Thursday, which is enough to meet the country’s import needs for about 4.11 months, according to the Central Bank of Kuwait.
Foreign currency reserves are largely exploited to pay for the importation of important government goods such as medicines as well as to pay off foreign debts.
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