Kenya must tackle the basics to get economy back on track

Kenya’s monetary policy is at a crossroads, the exchange rate volatile and prices of essential goods on a steady rise. After nearly seven years of relative calm, the economy appears to have been invaded by the forces of destruction that cannot be contained by the known instruments of policy.

Kenya is for the first time in nearly five years back to a point where the Central Bank cannot robustly defend the shilling – its reserves having been eroded to a four-year low even as the trade deficit continues to widen.

Government finances are not in good shape either raising the need for more borrowing. This is the reason that contrary to all expectations, the Central Bank Wednesday released more shillings into the market to ease liquidity as it prepared to borrow Sh10 billion from the same market.

That had the effect of pushing the shilling farther down the exchange rate slope to Sh97.25 to the dollar – the lowest ever since exchange rate controls were removed in 1994.

Adding impetus to the currency troubles are the acute supply shortages in key segments of the economy. A prolonged drought has drastically reduced the amount of cheaper hydro-electric power that is on the national grid, forcing the country to rely on thermal power that has more than doubled the cost of electricity to consumers.

Drought has also caused acute supply shortages of key consumer goods such as sugar, maize meal and milk sending prices to unprecedented levels.

These shortages have to be dealt with through importation of whatever is in short supply using the weak shilling. That adds more pressure on the local currency repeating the circle all over.

A casual look at these challenges may give the impression that they are temporary.

The reality is that they are the fruits of monopolization of the national policy making machinery by a short-sighted elite as is manifest in the annual allocation of resources via the national budget.

It has become clear that the root cause of all this lies in our collective refusal to recognise that no meaningful development will take place in Kenya until we get the basics such as feeding ourselves and meeting our energy needs 

Kenyan shilling slumps to record low for third day

The Kenyan shilling slumped to a record low against the dollar on Thursday on the back of euro weakness and has now fallen 3.3 percent against the greenback so far this week.

The shilling traded at a new low of 98.20 after setting record lows of 97.20 on Wednesday and 96.11 on Tuesday and traders said they were watching to see if the central bank would step in for the second straight day to curb the slide.

"It's still driven by Europe. We can see the euro overnight has slipped a bit, so that's the reason. That's key. It's just in line with what is happening," said Kennedy Butiko, deputy head of treasury at Bank of Africa.

Currencies in frontier markets such as Kenya often suffer when the dollar climbs against other major currencies on the perception there will be increased aversion to investing in riskier markets.

"The shilling is moving on global moves at the moment. We are waiting to see if the central bank will come in. Right now the market needs some liquidity," said Dickson Magecha, a trader at Standard Chartered Bank.

The central bank sold an unspecified amount of dollars on Wednesday to try and curb the shilling's fall. It climbed off an intra-day low of 97.20 but weakened again on the back of importer demand for the U.S. currency.

Some traders said they were a sceptical about whether central bank intervention would be able to stem the shilling's decline, unless it were prolonged.

"There's a bit of fear, caution and market jitters. We have seen wide spreads of as much as 1 shilling," said a senior trader at one commercial bank.

"Intervention did not work, did not yield much, and if they want to contain the market they need to come back again into the market by continuous selling of dollars," he said.

Traders said the central bank, however, may have limited scope to offload hard currency on a sustained basis given foreign exchange reserves at the end of last week stood at 3.53 months of import cover, below a target of four months.

The central bank also injected 15.3 billion shillings into the domestic money market on Wednesday in a bid to avoid a liquidity crunch ahead of government debt auctions.

The extra liquidity did not, however, prevent both a two-year Treasury bond auction and a 182-day Treasury bill sale from being heavily undersubscribed, helping to push yields higher.