Kenya’s central bank adopts new forex policy

directly to key sectors of the economy instead of to commercial banks, in an attempt to stem the shilling’s slide.
The central bank, which has been under pressure from markets to show it can intervene effectively to defend a shilling that has so far lost nearly 30 percent of is value this year, blamed the poor performance of the currency against the dollar on a lack of support from major foreign exchange holders.
The central bank sold on Monday an unspecified amount of dollars for the fifth time in September, but that has lent little respite to the shilling, exposing a crisis of confidence in the central bank’s ability to defend the battered currency.
” . . . the central bank now proposes to sell foreign exchange directly to targeted sectors of the economy which are most beneficial to the widest public,” the central bank said in a statement signed by Governor Njuguna Ndung’u.
“This will therefore shift a significant component of the demand for foreign exchange away from the market,” said the statement.
The shilling, which fell as much as 1,86 percent during Tuesday,s session did not move on the news.
The central bank’s policy up until now has been to intervene in the market by buying or selling foreign exchange to commercial banks.
The move highlights the bad blood between the central bank and commercial banks who have clashed in the past over the regulator’s pro-growth monetary policy stance.
“In addition, the central bank will continue with its onsite surveillance to establish whether banks have, in fact, been exploiting market power to the detriment of both foreign exchange earners and buyers,” the statement said.
Last week the central bank spooked some market observers who feared a retreat from free-market policies when it said it was committed to a market-determined foreign exchange rate only as long as it was supported by fundamentals.
“Friday’s Press statement and today’s are essentially inviting people to take their money out of the shilling while they can, as he is essentially saying it will no longer be a free market and people’s money will only be convertible at the central banker’s discretion.
“That’s the bottom line,” said independent analyst Aly Khan Satchu.
“They’ve got to come out and say they are committed to a fully convertible currency. It’s fallen so dramatically since Friday because of that statement and people are desperate,” he said. – Reuters.