Parallel exchange rates in Kenya emerge as dollar shortage bites
Tuesday May 31 2022
The shortage of dollars in Kenya is triggering the emergence of parallel exchange rate that has seen lenders buying and selling well above the printed official rate, the manufacturers' lobby has warned.
The Kenya Association of Manufacturers (KAM) said on Monday its members, the biggest importers of goods, were buying the dollar at more than Ksh120 compared to the central bank’s official exchange rate of 116.81 units as of Friday.
The lobby reckons that the volatility in the exchange rate market has slowed dollar trading among lenders or interbank deals, further worsening the scarcity of the US currency.
The exchange rate has long been a sensitive issue, with most players preferring silence for fear of reprisals from the central bank.
The central bank has in the past rebuked Stanbic Bank Kenya after a research note issued by its parent, South Africa’s Standard Bank, said a parallel exchange rate was emerging in Kenya.
This forced Stanbic Bank Kenya to issue a public statement distancing itself from the research note, which said that “two FX rates have been developing in the market.”
“Although the formally quoted exchange rate for the US dollar in the market is hovering around Ksh115-116, none of our members can access currency at that price in the market. The real market price is now above Ksh120,” KAM chairman Mucai Kunyiha said in a statement.
“Neither are banks able to trade dollars between themselves, further exacerbating the supply constraints. The risk here is that we are creating a parallel shadow market with unwanted consequences.”
A parallel exchange rate market develops, in such circumstances; and when the spread between the official and parallel rates is both substantial and sustained, says an International Monetary Fund official (IMF) working paper.
KAM said the lack of access to adequate hard currency was negatively affecting its members’ ability to settle obligations to overseas suppliers in a timely manner.
The industrialists' lobby said the crunch has strained relations with suppliers, at a time competition for raw materials has intensified globally due to rising demand amid lingering supply chain constraints.
It reckons the shortage is now causing an increase in the cost of doing business and panic buying of forex. Manufacturers are amongst Kenya’s largest importers.
CBK data, for example, shows that materials ordered by importers last year amounted to Ksh399.62 billion ($3.4 billion), only dwarfed by machinery and transportation equipment, which was valued at Ksh512.45 billion ($4.3 billion).
The US lender JP Morgan on March 22 issued a client alert saying that it was straining to complete some client transactions in Kenya due to dollar liquidity constraints.
The shortage has forced industrialists to start seeking dollars in advance, further increasing their working capital.
The situation is compounded by the weakening of the shilling against the dollar, which means that it is costing companies a lot more to buy forex.
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