Unlike in the past where such meetings are held once every quarter, the calling of the Monetary Policy Committee (MPC) meeting comes barely a month after the last one, a clear indication of the urgency of the matters at hand.
Key items giving the CBK team restless nights are the weakening of the shilling and high inflation.
Economists expect the MPC to raise the Central Bank Rate — the rate at which CBK loans banks as a lender of the last resort — to reflect the current economic realities as opposed to the day-to-day juggling of overnight interest rates.
The MPC is also expected to come up with a clear-cut way of stemming the weakening of the shilling once and for all, especially in as far as speculation and arbitrage over the currency is concerned. Expectations are that the bank may agree to periodically off-load dollars into the market to stabilise the shilling whenever dollar demand peaks.
There are also expectations that CBK will come up with specified measures, apparently punitive, on any person who is involved in arbitrage or speculation.
“We will be waiting to see if President Kibaki’s directive that speculators on the shilling be dealt with is addressed,” said Carol Musyoka, a finance analyst.
Last week, President Mwai Kibaki directed financial regulators to deal firmly with speculators, who may have taken advantage of the turbulence in the financial market for selfish gains.
Kibaki—who appears to be reading from the same script as a number of independent economists—reiterated that short-term financial gains could have long-term detrimental consequences on the economy.
Many say that the decision by CBK governor to call for the meeting is meant to save face over the blame that he has received in the last couple of months in the manner in which he has handled the weakening of the shilling.
Past trends have pointed a blaming finger on the CBK Governor Prof Ndung’u and MPC in the lacklustre manner in which they have handled the issue of the weakening shilling with many saying that the two largely sat on the fence as things got out of hand.
The shilling weakened 14 per cent against the dollar this year to a 17-year-low of Sh95.10 on August 9.
Worst Performing
Currently, the Kenyan shilling is world’s fourth, worst performing currency, after neighbouring Uganda’s shilling, the Maldives rufiyaa and the Suriname dollar.
Arguments over what has caused the slide have largely pointed to arbitrage and speculation.
A month ago, CBK issued a statement saying that it had taken an unspecified action against a number of major leading banks over arbitrage and speculation.
The directive was met by scoff from bankers as the shilling continued on its downward spiral with officials in banks saying that the governor has no direct law to effect his directive.
The following weeks saw a number of actions by CBK that have also largely failed to address the weakening of the shilling. This saw CBK resort to other measures to try tame both inflation and the weakening of the shilling.
In mid-August, CBK reviewed the rate at which commercial banks borrow overnight to offset their daily obligations at the clearing house by 509 basis points.
The banking regulator increased its lending rate at the CBK Discount Window to 11.34 per cent from 6.25 per cent. Later, the figure was reviewed upwards to 15.68, meaning that any bank that borrowed from CBK would loan the same amounts at least 20 per cent interest rates to any third party.
The move was seen as an attempt to stop banks from borrowing from CBK and tame liquidity in the process addressing inflation. The operational interest rate for the CBK Discount window was also to be reviewed from time to time and posted on the CBK website on a daily basis by 9.00 am.
CBK had hoped that by revising the rules guiding the operations of its Discount Window would curtail the second round effects arising from fuel prices and exchange rate volatility that have been fuelling inflationary expectations.
In addition, CBK put in place new regulations where any commercial bank lending in the inter-bank market would not be allowed to access funds through the CBK Discount window on the same day.
Similarly, any bank borrowing from the CBK Discount Window is prohibited from lending in the inter-bank market either on the day of accessing the window or on the following day.
The new guidelines also stipulated that CBK considers an individual bank’s foreign exchange trading behaviour over the previous four trading days in determining eligibility for access to the CBK Discount Window (overnight).
Import Cover
But even as CBK took these actions, the Forex market registered no significant change leading to a view that there could be other reasons as to the shilling’s continued weakening.
Those who in the know say that CBK may have had its hands tied over the issue by signing an agreement with the International Monetary Fund over import cover needs.
The argument goes that the CBK is not allowed to off-load dollars into the market to ease off the dollar demand as the arrangement requires that the country maintains a four month dollar equivalent import cover.
As if understanding the precarious situation that the country is in, last week, it was President Kibaki asking the International Monetary Fund to release additional funds from its Extended Credit Facility to help deal with a weakening shilling and surging money-market rates.
In January this year, the IMF approved a three-year arrangement under its extended credit facility for Kenya equivalent to about $508.7 million, with an initial disbursement of $101.7 million.
An additional payment of $65 million was approved in June. According Ragnar Gudmundsson, the IMF’s representative in Kenya, Kenya’s request for more funds will be considered when an IMF team arrives in the country in October to do a regular review of the existing program.
According to President Kibaki, who seems to have taken over the issue of the weakening of the shilling and liquidity in his own hands, the decision is to be taken along with other unspecified measures to ensure “orderly trading in the money markets for liquidity and foreign exchange”.
Kenya wants its next IMF disbursement to be paid early “to ensure ample supply of foreign exchange to finance required imports without putting pressure on the shilling.”
And so as MPC sits to chat the way forward on taming inflation, the volatile Forex market, economists will be watching closely if actions of MPC will be in line with the expectations of many.
