Is it time for Prof Ndung’u to celebrate as the shilling edges up? 

Sunday November 20 2011

It takes a lot for any central banker to rescue a quickly weakening currency, especially when the decline defies policy measures, but Prof Njuguna Ndung’u’s battle with the Kenya shilling has seemingly succeeded, at least for now.

The shilling has over the weeks gained substantially — locking in 9 per cent since its historic low of 107 to the dollar last month.

The unit hovered around Ksh93 to the dollar last week as tight liquidity pushed banks to sell dollars and importers stayed away from the market. But is the recovery sustainable in the coming months?

Prof Ndung’u would want this to be so, as it would give CBK a chance to resume gradual accumulation of foreign exchange reserves, which were sharply eroded during the period of volatility.

Most market watchers led by Renaissance Capital think the Kenya shilling still has a significant depreciation risk.

“While the shilling has appreciated in recent weeks, following the strong dose of monetary tightening in October, we still think there is a high risk of its weakening in the short term — especially if Kenya’s structural imbalances are not reversed by unwinding the expansionary fiscal programme,” said Yvonne Mhango, Renaissance Capital’s sub-Saharan Africa economist.


Last month, East Africa’s central bankers agreed to co-ordinate a tightening of monetary policy to stem foreign-exchange volatility and tame inflation, and this approach seems to be working for them.

In Uganda, the shilling has bounced back from its all time low of Ush2,901 to the dollar in September to last week’s average of Ush2,600. The Tanzanian shilling––which averaged Tsh1,695 last week –– is seen edging up in coming days on reduced demand.

The Tanzania unit had slid to a 17-year low against the dollar.

Most analysts see the Kenya shilling averaging at Ksh94-95 to the dollar in 2012. “We assign a 30 per cent probability to it weakening beyond Ksh100 in 2012, suggesting that interest rates may remain higher for longer in Kenya” said Ms Mhango.

Kenya’s precarious forex position explains its appeal to the International Monetary Fund for balance of payments support last month.

Kenya and the IMF agreed on a tentative $250 million deal to prop up the shilling over the next two years.

The CBK, whose monetary committee meets on December 2 to review the economy, raised the CBR from 11 per cent to 16.5 per cent last month, tripling the rate that the CBK lends to commercial banks from the 6 per cent in March. 

Dr Mbui Wagacha  a consultant on monetary affairs, argues a heavy policy dose and fiscal austerity could lift the shilling further, but that would come with serious implications for the economy.

“If we combine tight monetary policy with fiscal austerity, expect demand and inflation to fall, interest rates to rise and the shilling to stabilise on decreased overall demand, including imports and higher forex inflows.

Temporarily, GDP output will falter,” said Dr Wagacha, who is also sits on the CBK board.