The battle to save the shilling that saw gov’t pull all levers

By Edwin Okoth

March 2023 ended with a dent in Kenya’s currency stability when the shilling touched a record low against the dollar, and all concerned parties went on overdrive to save the shilling.

From efforts to push exports, cut the import bill, reign on banks and bureaus, and anything in between, all hands have been on deck to try and freeze the freefall that had seen bureaus exchanging a dollar at more than Sh140.
Sources close to the ‘operation save the shilling ‘say the National Treasury, the Central Bank of Kenya, and the ministry of trade were all pulled into action as soon as the shilling set off into its longest losing streak since 1988, the 41 straight days of downslide that began in late February.

A meeting called by the treasury in mid-March roped in the ministry of energy and petroleum into the thinking room as it emerged that a biting fuel shortage was in the offing. The oil marketers had no dollars to pay for the imported cargo.

A weak shilling, dwindling tea exports, and fuel shortage would be the perfect mix for a storm that was set to rock the economy. Nothing was going to be left to chance.
Then on March 13th, just when the shilling went beyond 144 against the dollar and far above the CBK benchmark rates .

“We have now agreed with two state-owned oil marketers to supply us with petroleum products on a six months-credit arrangement under a government-to-government deal. This will ease pressure on our dollar outflows. We can accumulate US dollars within that period until the seventh month when the bill will be due, and that way more dollar supply will reduce demand and solve part of the problem,” Energy and Petroleum Cabinet Secretary Davies Chirchir emerged from a long meeting at KAWI house in South C to make the announcement.

The think tank that involved the President’s economic adviser David Ndii and various oil marketers had established that nothing brought pressure to get the greenback like oil imports, every month.
Petroleum imports account for up to 30 percent of Kenya’s annual import bill. The sector needs close to Ksh.64 billion ($500 million) monthly to import diesel, petrol, and kerosene and meet the country’s growing product demand.

Against the odds of being sued for rushing a G-to-G deal and ignoring the market dynamics of the Open Tender System that Kenya has used over the years, the government clung to the credit on oil imports as a savior for the shilling.

It was also meant to signal that there would soon be so many dollars that they would be worthless for those hoarding for higher prices.

Saudi Aramco, the world’s biggest oil company, was roped in to advance diesel and Dual-Purpose Kerosene (DPK) twice a month with the payment falling due six months after the deliveries. The deal also involved Emirates National Oil Company Group (ENOC), which now supplies three cargoes of petrol every month.

Being a long shot, the real impact of the oil deal would only be felt months later, and no one was sure it worked because there was only a temporary relief, a slight gain that saw the dollar exchange at Sh126.
The country’s weekly foreign-exchange reserves remained low after falling to $6.88 billion on February 16, according to data published by the Central Bank of Kenya. The reserves were only sufficient to cover 3.8 months of imports, down from 3.9 in the previous week, and remained below the regulatory four months.
Kenya, the world’s largest black tea exporter, continued suffering from a price drop in the international market. These fell to $2.10 per kilogram at a March 6-8 sale in the nation’s port city of Mombasa, compared with $2.25 a kilogram at the first weekly auction this year.

Diaspora remittances weren’t looking up either, and the effects from the Covid- 19 and the election period disruptions on tourism were yet to be settled.

In a free market economy, bureaus were hungry for the dollars and willing to pay a premium. Banks largely ignored the central bank guiding rates and would go far above the benchmark. Anyone with a dollar was having a field day.

A new lever was pulled. The banks came under the sharp radar of their regulator, and banking experts had to watch what they said. One who had intimated on the tightened nose said the meetings chaired by CBK began to sound like high school parades.

“We suddenly began taking the blame for things we had no control of. Instead of being taken as victims of the dollar shortage, we were now being asked to behave well in controlling sentiments which was not the key driver in the shilling slide,” an analyst popular in the local media but who has in recent days adopted a low profile told the Nairobi Business Monthly.

CBK would soon slap banks with the issuance of the Kenya Foreign Exchange Code (the FX Code) to commercial banks, a standard for the banks to ‘strengthen and promote the integrity and effective functioning of the wholesale foreign exchange (FX) market,’

“CBK continues to closely monitor the market considering its growing complexity and emerging risks to fair and effective trading. It is against this backdrop that CBK has issued the FX Code,” the bank wrote in a March 22nd release.

The move may have tamed the bank but not the shilling, which has not made any major move. It still trades above 127 against the US dollar, a slight gain from the peak during the month.
The bureaus were also given malign warnings, and some almost bulged, lowering their dollar valuation to a low of Sh124.

So one may ask, how did we get here?
After years of reliance on imports which require the dollar to actualize, Kenya had shot itself on the foot, creating an insatiable appetite for the greenback to fill its needs for basic items that could easily be manufactured locally.

The environment created by high electricity prices, labour costs, and shifting government investment tax policies have also pushed investors out and left the country a major importer.
Then came the dollar-denominated loans, which have begun falling due and some of which will demand from next year, like the Eurobond; these have squeezed the country’s reserves and pushed the shillings at a disadvantage against the dollar.

The shilling’s pressure for the first tie spread across the economy; the importers who had ordered for goods had delays when their banks had no dollars to pay for the goods they were importing.
Some petrol stations had dry spells after oil marketers failed to raise the dollars to get fuel out of the storage depots, and fuel prices went up when the forex element was adjusted.

Last month, electricity distributor Kenya Power said it would start charging some of its customers in dollars and euros to shield the utility from foreign exchange losses following the weakening of the shilling.

The company’s financials were hurting through exchange rate losses since it also pays most of its electricity suppliers in US dollars and Euros.

The wobbly shilling, whose worst was seen in March, tested the country’s currency fabric. Many businesses went the extra mile to openly display their preference for dollar payments in a way never witnessed before.

For many, receiving payments in dollars and euros would help avoid exchange losses for their businesses, with a number of prime office space landlords in Nairobi beginning to set rent prices in dollars.
The sliding shilling, which increases the cost of buying household commodities, has seen the March inflation just eight points shy of the double digits at 9.2 percent in the latest release by the Kenya National Bureau of Statistics.

It was a windfall season for those paid in dollars as they got a natural salary increment as the shilling suffered. Their Kenya Shillings salary equivalent grew fatter, and they smiled at the banks and bureaus.
Will the efforts yield, and are there more levers to pull in April? That remains to be seen as the shilling continues to receive attention, and market sentiments factor in the political unrest witnessed during
opposition-led unrest.

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