U.S. Dollar Crunch Subsides as Kenya’s President Ruto Revives Interbank Forex Market

by | May 13, 2023 | Business, Money, News | 0 comments

In a remarkable turnaround, the once-critical shortage of U.S. dollars in Kenya has seen significant alleviation, courtesy of an intervention from President William Ruto, which has revitalized the interbank currency market.

Large-scale U.S. dollar purchasers have observed a noticeable rise in the greenback’s availability over the past few days. This is a stark contrast to the previous market environment, where banking institutions grappled with an occasional depletion of the American currency, leading some to limit daily dollar purchases to a meager $5,000.

President Ruto’s decree on March 22 for the reactivation of the interbank foreign exchange market aimed to eliminate market irregularities that had aggravated the scarcity of foreign exchange.

Over the past years, the interbank market for hard currency had become inactive due to stringent oversight by the central bank, according to traders. This oversight hindered the execution of transactions and, coupled with the absence of a robust interbank forex market, contributed to a severe hard currency shortage, compelling the government to negotiate extended credit periods for indispensable imports like petrol.

Furthermore, this situation spurred the growth of a shadow forex market, where money-changers offered exchange rates diverging from the official rate set by the central bank, by over Sh10 per dollar.

Now, however, the gap between the official and open market rates has reduced to an average of Sh6 per unit, down from Sh13 in early March.

“Banks are now more equipped to fulfill customer orders. While the daily limit on dollar volumes is still in effect, dollar availability has definitely improved,” disclosed a leading importer who wished to remain unnamed.

Meanwhile, banks have resumed purchasing dollars from customers at rates beneath the official Central Bank of Kenya (CBK) rate, a practice prevalent before the disruption of the domestic forex market.

Muathi Kilonzo, Head of Equities Kenya at EFG Hermes, remarked, “The forex interbank market’s dormancy previously led to insufficient price discovery, causing enormous spreads. Now, we’re witnessing a more efficiently functioning exchange rate market.”

Consequently, the dwindling supply of dollars and the near-collapse of the interbank forex market resulted in a wider spread. The absence of price competition among banks left buyers at the mercy of sellers, leading to inconsistencies in the dollar exchange rate.

In addition, the necessity to buy dollars from their own clients has given customers the power to set prices. Major firms began trading in dollars amongst themselves, allowing those in possession of dollars to secure a better rate by selling directly to needy individuals and firms.

Such activities were fostering an illicit parallel market, posing a threat to economic stability by discouraging foreign direct investment (FDI), encouraging rent-seeking, and diminishing the interbank forex market.

The severe dollar shortage evolved into a national issue due to the resultant inflation and potential disruption in the supply of crucial imported goods.

Addressing these concerns, President Ruto urged the central bank and commercial lenders to resuscitate the interbank forex market.

“I’m pleased to see that sector players, including our banks, are cooperating with the CBK to regain control of our market and prevent distortion by brokers,” Dr. Ruto stated on March 12.

Trading of currency among Kenyan banks had been on the decline due to central bank pressure on commercial lenders to prevent the shilling from depreciating too rapidly.

The Central Bank’s governor, Patrick Njoroge, has consistently dismissed allegations of excessive market interference, maintaining that the regulator was merely fulfilling its duty of ensuring discipline

error: Content is protected !!