Kenya’s market could lose confidence in forex effectiveness as shilling nears 117 mark
The Kenyan Shilling has continued to weaken against US Dollar, with manufacturers raising concerns over the high cost of obtaining the currency in the market as it now approaches the 117 level.
The Kenya Association of Manufacturers (KAM) has asked the Central Bank of Kenya (CBK) to implement actions that would return the dollar market to predictability and, crucially, to “supplies of currency as and when needed in order to restore confidence in the market.”
According to the CBK data, the shilling is currently trading at 116.6 against the dollar, a 0.2 percentage point drop from last week.
KAM worries that moving forward, the market would lose confidence in the transparency and effectiveness of the country’s foreign exchange market.
“Our immediate concern is the availability of US Dollar in the market to meet our requirements,” said KAM in a statement.
High commodity prices in the international market have increased the dollar required to purchase a similar quantity of products.
For example, by March this year, Crude Palm Oil (CPO) price surged to Ksh.231,078.44 per metric tonne from the lows of Ksh.81,694.39 before the advent of the coronavirus pandemic in March 2020.
Manufacturers have been struggling to obtain sufficient dollars to meet their dollar obligations from commercial banks.
KAM says these struggles have been consequential with manufacturers being forced to plan for foreign currency payments by purchasing the currency in advance resulting in an increase in working capital.
There has also been a delay in acquiring the requisite US Dollar for imports, which has had a negative relation with suppliers with some now requiring Letters of Credit to transact.
In most extreme cases, KAM says supplies have been cut or delayed as credit limits from the manufacturers’ suppliers have been breached.
“This situation, compounded with global challenges we are facing, calls on the Central Bank and Monetary Policy Committee (MPC) to propose and implement policy actions to return the market to predictability,” said KAM.
The reserve bank in November last year, allayed fears of volatility in the local forex exchange indicating the recent weakening of the shilling remains aligned to movements of other regional and world currencies.
“At the end of the day, our exchange rate policy has not changed and ours is really a flexible exchange rate regime and we intervene just to minimize volatility but we do not set a direction or level. We allow the markets to push the exchange rate, strengthen and weaken it, as long as there is no volatility,” said CBK Governor Dr. Patrick Njoroge.