The two faces of the Kenyan Shilling

Sometimes in October 2019 when Kenya changed the face of its currency through demonetisation, Dr Patrick Njoroge stood outside a packed conference room at the sixth floor of the imposing Central Bank of Kenya building. He stood very still, breathed deeply as if he carried the weight of the world on his shoulder and sighed.

For that brief moment as he sighed like he bore such an enormous burden, he showed a version of himself. But the moment passed too quickly. He braced himself and swung into the room fast as if resigned or resolute about the spectacle he was about to set in motion. 

His entry was greeted by the snapping away of camera shutters that caught his almost childlike smile, a plastered wide grin. He strutted in, acknowledging the deputy governor Sheila M’Mbijjewe with a nod and taking his place at the theatre, unblinking to the flash of camera lights that came alive clicking for a perfect shot, a smiling shot.

Dr Njoroge is a man who understands the need for two faces, a facade is important in the business of central banking. French philosopher Denis Diderot in ‘Rameau’s Nephew’ tells of a story of one day he sat at a table with a King’s minister with brains enough for ten men; who showed that; plain as two and two make four, that nothing is more useful to the nation of the earth than lies, nothing more harmful than truth.

Dr Njoroge has been good at keeping the grinning mask on, out of practicality or simply out of necessity and so has he been at keeping an official exchange rate that scarcely resembles the value of the shilling kwa ground

In official parlance, Kenya’s shilling has been market determined but in practice the shilling has always been a political hot topic, whose value has been determined by the immediate needs of the powerful in government. The government has borrowed out of its wits and cannot afford to allow debt to spiral yet as a central bank, its role is not cleaning up after politicians.

Former President Uhuru Kenyatta during the launch of the new banknotes said the freedom of the Central Bank was “operational independence” but added that the regulator must cooperate with the executive which has been the case in as much as the value of the Kenyan currency vis a vis the dollar is concerned.

Since Dr Njoroge was appointed to his role in June 2015 when the shilling was trading at Kes98.5 against the dollar, he has overseen the longest period of shilling stability for almost six out of his eight years in office that has allowed the government to borrow dollars under a veneer of stability. 

The shilling depreciated just 10.8 percent between 2015 and 2021, after which the currency dropped like a stone, 18.9 percent over the last two years, a period that coincided with Kenya losing most of its policy making decision to multilateral lenders that demanded currency flexibility in exchange for multibillion dollar loans to avoid defaulting on the external loans taken up during the good years of the Jubilee government. 

Read also: KCB income from trading dollars doubles

For most of his tenure, Dr Njoroge had been able to manage stability of the forex market and had only a slight scare in September 2015 when it hit 106 against the greenback, at the time considered the lowest point, and a psychological mark. 

Before 2015, the Kenyan shilling once touched 107 against the dollar which soured the tenure of former Central Bank of Kenya Governor Njuguna Ndung’u. When he took office, Prof Ndungu, who is now the current Treasury Cabinet Secretary, had seen the shilling oscillate between 67 and 92 points against the dollar.

However, in 2011 depreciation of the Kenyan shilling to a low of 107 units to the dollar and 19.72 percent inflation in November sent tongues wagging leading to a parliamentary probe that blamed Prof Ndung’u for hesitating to act and propelling the slide.

But his successor Dr Njoroge sold the relative stability under his tenure that saw consistency with the strengthening of the current account with very clear inflows from exports and outflows to imports through the forex market.

But then everything changed, the shilling slipped past the psychological mark and it is anybody’s guess where the country’s currency will slide to, with huge ramifications on the country’s debt position and cost of living.

The way Kenya is structured as a country is that we import three times more than we export, for the year to December 2022 we had exported goods worth $7.4 billion (Kes961.2 billion) and imported $19.2 billion (Kes2.4 trillion). So if we export one dollar worth of merchandise we are importing three dollars, so we need two miraculously from somewhere.

Then we have accumulated enormous foreign debt $37.8 billion (Kes4.6 trillion) which is repaid by buying dollars. Post Covid-19 we have a situation where exports and tourism were drastically affected, only for the country to be hit by higher commodity prices due to Russia’s invasion of Ukraine, then came crippling drought that required importation of food.

This perfect storm cooked up a huge demand for dollars even as the US Federal Reserve Bank hiked exchange rates to curb inflation reducing global dollar supply.

All these factors have pushed the Central Bank of Kenya to use up its reserves, from $7.9 billion dollar reserves which has been drawn down to $6.6 billion at the beginning of this month to pay debts and intervene in the market. 

As the state dollar holdings reduced, the regulator resorted to advising banks to impose a daily cap of $50,000 (about Kes5.78 million) on selling dollars. This has also had the unintended consequence of pushing panic buying and mass portfolio exits from the Nairobi Securities Exchange as foreign investors fear being trapped in the emerging economies due to difficulty in finding dollars to exit the market.

According to Dr Njoroge, the shilling today is trading at Kes129.9, the lowest the currency has ever traded. However, it is open secret that this rate is fictitious; the banks are exchanging the shilling at Kes140 on average and even the government, the Energy and Petroleum Regulatory Authority is quoting the exchange rate at Kes133.9 for setting the country’s fuel prices.  

But Dr Njoroge is leaving in June, after two four-year terms and I asked a forex trader in one of the big banks whether his exit will be the signal for market correction that will ultimately determine where the shilling truly lies. The banker, who spoke on condition of anonymity, said they see the official rate coming to par with the market rate which will happen sooner or later.

“We do not look at the individual but at the institution so it is not about Dr Njoroge leaving, but we are seeing that at some point, the rate will have to align with the market but that will depend on the measures the government puts in place to correct the market,” the banker said.

Depreciation of the shilling is not ideally a bad thing, if the country was productive exporting exceptionally huge volumes of tea, coffee, horticulture and minerals, a weak currency would mean higher earnings for farmers since the dollar translates to more Kenyan shillings. 

But in Kenya where export agriculture is dominated by foreign companies, and the country imports way more than it exports, a weak shilling is the enemy. Worse still, the government empathises more with importers since it is also importing capital for consumption in its budgets and laying low-return fancy infrastructure.  

“Devaluation works to soak up excess capacity in a high productivity export oriented economy. It drives per capita income if that economy is labor intensive, that is, the fruits of more exports flow to the workers,” an analyst told me in confidence.

“We are sadly none of those things. Devaluation in Kenya will benefit a tiny elite, and destroy the living standards of the vast majority of the poor,” the source said.

It already has. The plunge in value of the Kenyan shilling has hit every household in this country in terms of the cost of the imported petroleum and the translating transport costs on every goods and services, the cost of electricity and imports of everything from tooth picks, Mexican maize to Japanese cars.

And then there is the huge debt burden which becomes heavier every time the shilling weakens, a straw at a time that can break a camels back.

Even though it looks attractive to try and keep the shilling strong against such mounting economic challenges, this is also not beneficial.

The strong shilling eroded the competitiveness of Kenya’s regional exports, encouraged irresponsible borrowing by the government and has created a huge opportunity for arbitrage and speculation which is enriching just a few well connected individuals. 

The five banks, Stanbic, KCB Group, Cooperative, Stanchart and Absa Kenya, which have released results for the period ending December last year, show they increased income from trading dollars in one year by 57.5 percent to Kes32.7 billion while the wealthy holding dollar deposits saw their riches expand 14 percent to Kes921 billion. 

“Regrettably, the current (over)valuation is probably not doing anything besides again providing a huge speculative profit to currency arbitrageurs, favoured importers of critical goods, and exporters of capital (whether dividend repatriators, debt repayers or miscellaneous others),” the analyst said.

“Thus sadly we must devalue, but lets not pretend it will benefit the majority of Kenyans immediately. It will be a decade before benefits can be seen, and even then if _A LOT_ of things *all* go right,” the source said.

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