Central Bank of Kenya (CBK) Governor Kamau Thugge has explained how they saved the Kenyan shilling from collapsing and transformed it into one of the best-performing currencies in the world this year.
The CBK Governor said the shilling was salvaged after the Central Bank initiated a series of deliberate steps to tame it.
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According to Thugge, some of the measures CBK took included raising the benchmark interest rate, the inter-bank market, and the announcement of a partial repayment of the Eurobond and the subsequent repayment.
This repayment according to Thuge helped to reassure an agitated market on Kenya’s fiscal status after fears that the country would default.
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CBK Governor Narrates How the Shilling was Saved
Thugge stated that CBK interventions to restore calm and stability to the exchange rate dates back to his first days in office on June 19, 2023.
“When I came into office, I found a situation where inflation was very high and outside our target band and there was significant pressure on the exchange rate. I had a meeting with bankers because I couldn’t understand why there was so much pressure and they were candid noting there were some reforms agreed upon but not implemented by the CBK,” he said.
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“After noting some of the demand pressures, including a backlog of people seeking to get foreign exchange, I called for a monetary policy committee meeting within one week and we agreed to raise the policy rate by 100 basis points (one percent) which was a surprise to the market.”
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Other Measures Undertaken on Pulling the Shilling Back
He further explained that some of the measures he has undertaken include allowing of an electronic trading system and the lowering of the minimum transaction recorded as a forex interbank deal from $500, 000 (Ksh 64.2million) to $100,000 (Ksh 12.9 million).
Throughout 2023, inflationary and currency pressures persisted, prompting a further increase in the policy rate, which raised the Central Bank Rate from 9.5 percent in May last year to 13 percent in February this year.
Although this hike created a positive real interest rate differential between Kenya and other economies, it also kept the exchange rate under pressure due to speculation about a potential sovereign default, fueled by the looming maturity of an outsized Ksh257.1 billion ($2 billion).
“Every day, we had the exchange rate depreciate. A lot of Kenyans saw this as an investment opportunity and saw dollars as an asset because it would appreciate every month and they would get more shillings for it. We needed to find a way to break that speculative element,” Kamau Thugge added.
Eurobond Buyback
In February, Kama Thugge said CBK adopted a dual strategy to counter speculation.
First, they initiated a partial buyback of Sh192.8 billion ($1.5 billion) in sovereign bond notes maturing in June, aiming to alleviate concerns about default.
Following the buyback, CBK promptly issued a new infrastructure bond, which attracted substantial participation from foreign investors, resulting in significant new Forex inflows.
Since February, the shilling has rebounded, gaining more than 32 units per Sh32 from its lowest point at the end of January.
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On Friday June 21, Kenya settled the remaining Eurobond balance amounting to Ksh. 72 billion ($560).
Currently, the shilling is quoted at 128.6 more than 20 percent against the US dollar with Forex Bureaus in Nairobi trading at 128 buying and 129 selling.
According to Thugge, it is difficult for him to tell whether the shilling has peaked in its gain or not.
“It’s difficult to say whether we are at equilibrium. What we are trying to have, is a market-determined exchange rate that will respond to what’s happening in the current and financial accounts,” Kamau Thugge said.
If the rate needs to incentivize exports, it should be able to depreciate but this should happen in a way that is sustainable and non-disruptive.”
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