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Politics
Home›African Arguments›Politics›Kenya: Risks for Banking and Manufacturing Operations Heightened by Erratic Policy Reactions- By Exclusive Analysis

Kenya: Risks for Banking and Manufacturing Operations Heightened by Erratic Policy Reactions- By Exclusive Analysis

By Uncategorised
November 4, 2011
1352
0

Njaguna Ndung’u – Governor of the Central Bank of Kenya

In recent public statements, Central Bank of Kenya (CBK) Governor Njaguna Ndung’u has shown that he is resistant to tightening monetary policy further to stem the depreciation of the shilling, pointing instead to an urgent fiscal policy solution from the Treasury. This reflects growing policy difficulties between the CBK, the Treasury and Parliament due to overlapping jurisdictions for managing monetary policy, as inflation soared and the shilling depreciated by 33% to the US dollar. Kenya is undergoing real economy pressures on the back of infrastructure growth and a climbing oil bill, which has stoked import demand and forex scarcity in the market. The CBK has repeatedly sent mixed signals to the market, in turn aggravated by the Parliament-imposed September Price Control Act, which sets upper price limits of key commodities, and is regulated by the Treasury.

On 27 September, for instance, the CBK announced that it would circumvent commercial banks by selling forex directly to key sectors, only to reverse the decision the following week on the order of the Prime Minister Odinga. In early October, the CBK then raised its lending rate by 400 basis points to 11%. On 13 October, the Finance Ministry then announced that it would reduce the forex limit of banks from 20 to 10% of core capital, carrying the commercial implications that banks are barred from holding dollar reserves for business needs beyond customer deposits. This will negatively affect the ability of banks and their corporate customers to transfer capital abroad whilst increasing their exposure to the CBK’s forex shortages. Although this will serve to inject dollars into the market in the next three months, the main factor mitigating speculation is the 2 November deal with the IMF for an additional $250 million to stabilise the shilling, with the first half of the facility expected before the end of 2011. As of 7 October 2011, Kenyan foreign-exchange reserves were $3.73 billion or 3.4 import months, short of the recommended four months of coverage, whilst inflation was 17.3%, far above the policy target of 5%.

Restricted access to forex will complicate firms’ trading plans in the six-month outlook with risks of contract and order cancellation if they cannot settle bills in forex. Importer finance planning will be particularly disrupted whilst the Kenya Association of Manufacturers has indicated that it will be compelled to pass on the costs incurred by the depreciated shilling onto consumers. This inflationary pressure will lead to conflict with the Price Control Act, potentially carrying the risk of fiat commands by the executive for producers to bear the costs instead.

Exclusive Analysis is a specialist intelligence company that forecasts commercially relevant political and violent risks worldwide.

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