Kenya’s Dollar Shortage Triggers Two Parallel Exchange Rates
The shortage of dollars is triggering the emergence of a parallel exchange rate which has seen lenders buy and sell well above the official printed rate, the manufacturers’ lobby has warned.
The Kenya Manufacturers Association (KAM) said on Monday that its members, the biggest importers of goods, were buying the dollar at more than 120 shillings against the central bank’s official exchange rate of 116.81 units on Friday.
The lobby believes that market volatility in exchange rates has slowed dollar trade between lenders or interbank transactions, further exacerbating the scarcity of the US currency.
The exchange rate has long been a sensitive topic, with most players preferring silence for fear of central bank retaliation.
The central bank has in the past reprimanded Stanbic Bank Kenya after a research note released by its parent company, South Africa’s Standard Bank, said a parallel exchange rate was emerging in the Kenya.
This forced Stanbic Bank Kenya to issue a public statement distancing itself from the research note, which stated that “two exchange rates have developed in the market”.
“Although the officially quoted exchange rate for the US dollar in the market hovers around 115-116 Sh, none of our members can access the currency at this price in the market.
The real market price is now over 120 shillings,” KAM Chairman Mucai Kunyiha said in a statement.
“Banks are also not able to trade dollars with each other, further exacerbating supply constraints. The risk here is that we are creating a parallel black market with undesirable consequences.
A parallel exchange rate market develops in such circumstances; and when the gap between official and shadow rates is both substantial and sustained, says an official International Monetary Fund (IMF) working paper.
KAM said the lack of access to adequate hard currency negatively affects its members’ ability to settle their obligations to foreign suppliers in a timely manner.
The industrial lobby says the crisis has strained relations with suppliers, at a time when competition for raw materials has intensified globally due to rising demand amid persistent constraints of the supply chain.
He believes that the shortage is now leading to an increase in the cost of doing business and forex panic buying. The manufacturers are among the biggest importers in Kenya.
CBK data, for example, shows that materials ordered by importers last year amounted to 399.62 billion shillings, only dwarfed by machinery and transport equipment, which was valued at 512.45 billion shillings.
US lender JP Morgan issued a client alert on March 22 saying it was struggling to complete some client transactions in Kenya due to dollar liquidity constraints.
The shortage forced manufacturers to start looking for dollars in advance, further increasing their working capital.
The situation is made worse by the weakening of the shilling against the dollar, which means that buying foreign currency is much more expensive for businesses.
It has also seen companies hedge against further weakening by hoarding dollars or tightly guarding their reserves of greenbacks.
“Exporters and other entities holding US dollars are reluctant to sell at lower prices because they know clearly and visibly what the market value of the currency is. From the above, it would appear that the market is losing faith in transparency and transparency. efficiency of our foreign exchange market,” Mr. Kunyiha said.
The IMF said in 2018 that the shilling was overvalued, citing strict management of the foreign exchange market by the central bank, findings that CBK Governor Patrick Njoroge denied.
Dr Njoroge, a former senior IMF official who took over as head of the central bank in 2015, argued that Kenya had a flexible rate policy and only intervened to smooth volatility.
Standard Bank noted in the December 2020 research paper that “due to this divergence in screen and exchange interbank rates, it is true that price discovery has been very tedious”.
“But the conundrum for them was whether to trade at the executable interbank exchange rate above the official CBK rate or simply stop supplying dollars to the market, due to fears of retaliation from the apex bank,” add the note.
The CBK expressed unease with the rating, prompting Stabic Kenya to disown it.
“The contents of the report do not reflect the position of Stanbic Bank Kenya Limited,” Stanbic said after the Business Daily published the research note.
The shilling averaged Shs 116.71 to the dollar yesterday based on official CBK rates, after depreciating Shs 113.13 at the start of the year and Shs 104.44 at the end of the year. end of March 2020.
Local demand for dollars has increased significantly this year, alongside surging imports following the full reopening of the economy, which has triggered pent-up demand for consumer goods and capital goods.