WEDNESDAY, 12 OCTOBER 2011 00:02 BY FRANCIS MUREITHI AND REUTERS
THE shilling hit a record low of 107 against the US dollar yesterday but Central Bank of Kenya governor Prof Njuguna Ndung'u warned Parliament he does not expect the currency to improve within months. The shilling has lost more than 30 per cent in value this year from around 85 to the dollar.
Ndung’u told the Parliamentary Committee on Finance yesterday that consumers will have to bear the brunt of the weak shilling and high interest rates for three to six months. He said the weakening currency is a global problem and that other countries like Nigeria are also struggling with depreciation.
The governor said the European debt crisis is one key factor behind the weakening shilling. He said the CBK had not anticipated the Europe debt crisis. Ndung’u said food shortages as a result of drought and the increase in fuel prices had hurt the economy and contributed to the volatility of the shilling. “This is a combination of so many other forces,” Ndung’u told the committee chaired by Nambale MP Chris Okemo at Continental House.
The governor said the CBK had tightened monetary policy to deal with the shilling's volatility. On September 27 the CBK said that it would trade foreign exchange directly with large customers at a favourable rate and bypass commercial banks. But last Friday a technical team set up by Prime Minister Raila Odinga said Kenya was committed to a free floating exchange rate. "Corporates that were holding back, hoping that the CBK would meet their dollar demand as it had earlier indicated, are now buying after the Prime Minister's team said CBK would not be selling," said a senior trader at a commercial bank.
Ndung’u yesterday told MPs that borrowers could be hurt by commercial banks raising their base rates after the Central Bank Rate was raised from 7 per cent to 11 per cent earlier this month. Analysts had hoped the huge interest rate hike would restore confidence in the currency and in a regulator that markets feared lacked the mettle to tackle inflation and defend the shilling. But they said any improvement in the currency would be gradual.
Ndung'u explained yesterday that interest rates will start falling once the pressure on the shilling eases. The governor told the MPs that discussions were taking place with the International Monetary Fund on other measures to stabilise the shilling. He said the government in November 2010 asked the IMF for a loan facility of about US $500 million to boost Kenya’s foreign exchange reserves.
In April, Kenya asked the IMF for a further facility of $250 to $350 million for the reserves. Committee chairman Okemo called on Kenyans to back the CBK. “If we leave the governor on his own, I don’t think the solution will be found. It is very clear that there is the demand side of the problem and the supply side of the problem. Until you put these two together, you cannot have a holistic solution,” said Okemo.
Okemo said the committee will next week meet other stakeholders including the Finance ministry, Energy ministry and Agriculture ministry. Okemo said measures should now be put in place to buy surplus food from farmers. He said long-term measures need to be taken including support for the supply side of economy, building up strategic reserves to support domestic production, investments and promotion of exports.
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