IMF reveals why CBK is silent on Shilling’s free-fall

IMF reveals why CBK is silent on Shilling’s free-fall

Critics have wondered how the tough Central Bank of Kenya (CBK) Governor, Dr Patrick Njoroge, has helplessly watched as the Shilling spectacularly buckled under the weight of a strong dollar.

As a strong defender of the Shilling, Njoroge has in the past ruthlessly cracked down on any suspicious elements of speculation. He would quickly intervene when it seemed like the local currency was being battered by the vicissitudes of the global market.

But this time, he has been silent, even as the Shilling hit a low of Sh113.14 against the dollar. Is there a change of heart from the no-nonsense governor?

Well, the International Monetary Fund (IMF) in a new report has offered an answer.

“The CBK appropriately allowed the Shilling to act as a shock absorber during the pandemic and should continue to do so while using forex interventions only to minimise excessive volatility,” said the IMF. It also noted that CBK “should continue to do so (using the exchange rate as a shock absorber) while using forex interventions only to minimise excessive volatility.”

According to the received wisdom, flexible exchange rates insulate economies from external shocks such as the Covid-19 pandemic.

When the Covid-19 broke out, there was a capital flight as foreign investors spooked by news of the first case of coronavirus who evacuated their wealth from the Nairobi Securities Exchange (NSE).

Moreover, as governments imposed travel restrictions into and out of their borders, tourism earnings dipped while lockdowns in Europe and North America affected Kenya’s export earnings.

All these had the effect of reducing the supply of US dollars and with limited supply, their demand rose, leading to a spike in its price (exchange rate).

The CBK governor would have sought to intervene and fix the exchange rate at a certain price – just like fixing the price in the goods and services market.

Njoroge has not budged even with banks complaining there is an insufficient supply of the greenback.Going all out into the market would have meant the country raiding its reserves of foreign currencies at a time when they were not being replenished.IMF lauds CBK for not taking this route. Instead, the financial regulator let the market take its course, with the exchange rate operating as an automatic shock absorber that adjusted to soften the impact of the shock, according to the IMF.This, the Washington-based institution noted, was unlike in the previous instances when CBK seemed to prop up the Shilling whenever there […]

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