Tough stance taken by central banks in East Africa to contain currency volatility is bound to face real test in 2020, with regional currencies projected to come under pressure as the world takes a wait-and-see the end game of US-Iran hostility.
The US-Iran hostility has ignited a surge in crude oil prices with indicative Brent crude price rising to an average of $72.01 a barrel, up from $65.50 in December last year, a development that is bound to have direct impact on petroleum import bills in the region.
The economies were already facing an increased demand for imports, dwindling exports, rising inflation and foreign debt servicing obligations. And although subdued oil prices, an increase in tourist numbers and growing remittances were credited for the largely stable currency regime in recent years, there was also deliberate effort to contain inflation at below five per cent in Kenya, Uganda and Tanzania, which was core to maintaining strong currencies.
Last year, Kenya and Tanzania took drastic but administrative measures to tame currency volatility. Central Bank of Kenya (CBK) governor Dr Patrick Njoroge whipped forex traders against speculative trading, silenced analysts from forecasting on the shilling and implemented direct interventions to stem volatility.
The CBK was accused by among others the International Monetary Fund of deliberately managing the shilling instead of letting it to free float, the result of which has been an alleged overvalue of the local currency by 17.5 per cent.
The Kenyan currency has maintained a prolonged stability exchanging at an average rate of Ksh101 to the dollar despite persistent volatility in the global market.
In Tanzania, the same tough stance saw the government crackdown on foreign exchange bureaus, revoking 100 licences and banning the use of unofficial data.
The effect has been a steady currency whose only short episode of fast depreciation was in January and February 2019 driven by interest rate hikes in the US market.
On average, the Tanzanian shilling depreciated against the dollar by 1.7 per cent in 2018/19 compared with two per cent in the preceding year, trading at an average of Tsh2,293.08 to the dollar.
“The stability of the shilling was largely explained by low inflation and sustained prudent monetary and fiscal policies,” said Bank of Tanzania in its 2018/19 annual report.
For Kenya it meant a build-up of foreign exchange reserves to $8.8 billion (5.5 months of import cover), to provide cover and a buffer against short term shocks.
In Tanzania, the reserves stood at $5.2 billion by August 2019, and in Uganda they stood at $3.3 billion by end of June 2019.
“With most central banks adopting accommodative policy stance, we expect the prospect for high yields propelling inward foreign portfolio flows which will support the domestic unit,” said Churchill Ogutu, research analyst at Genghis Capital.
In October 2019, CBK released a report on the Assessment of Exchange Rate Misalignment in Kenya whose verdict was that Kenya’s exchange rate was largely consistent with economic fundamentals.
This was based on the finding that misalignment of the local currency real effective exchange rate declined on average from 4.1 per cent in 2010-2013 to 2.6 per cent in 2014-2017.
Consumers in the region are expected to dig deeper into their pockets, thanks to a rise in the cost of living due to high inflation.
In Tanzania, inflation rose to 3.8 per cent in November, from 3.6 per cent in October data from the National Bureau of Statistics shows.
In Kenya, inflation stood at 5.56 per cent in November, up from 4.95 per cent in October, due to a rise in the cost of some foodstuff, the Kenya National Bureau of Statistics said.
In Uganda, the annual headline inflation for the year ending November 2019 rose by three per cent from 2.5 per cent in the year ended October 2019. The Uganda Bureau of Statistics attributed it to a rise in the annual core inflation to 2.9 per cent from 2.6 per cent.