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Importers warn of Kenya parallel forex market amid dollar shortage

Kenya’s foreign reserves stand at $8.17 billion, equivalent to 4.86 months of import cover, the Central Bank of Kenya Governor Patrick Njoroge said.
Image: Bloomberg

Kenya faces the risk of a fully-established parallel foreign-currency market as importers purchase dollars at a rate about 3% higher than the official quotes, according to a manufacturers’ lobby.

Members of the Kenya Association of Manufacturers are buying the greenback at 120 shillings and above, compared with prices the banks publish of around 116 shillings, the group said in a statement on Monday. The business group spoke out about access to dollars before the central bank announced its first rate hike in almost seven years, citing inflation risks.

“It is our belief that the differential is contributing to the shortage. Exporters and other entities holding US$ are reluctant to sell the dollar at lower prices as it is clear and visible to them what the market value of the currency is,” the manufacturers said. “The risk here is that we are creating a parallel shadow market with unwanted consequences.”

The statement follows one the manufacturers in East Africa’s largest economy released last month, expressing frustration over getting dollars. Other African markets are facing similar shortages, including Malawi where the government decided to devalue its currency by 25%. In Zimbabwe, the inflation rate jumped to 132% after its currency slumped.

Kenya’s foreign reserves stand at $8.17 billion, equivalent to 4.86 months of import cover, the Central Bank of Kenya Governor Patrick Njoroge said in a monetary policy statement on Monday. He announced a 50 basis-point increment in the benchmark interest rate to 7.5%.

The central bank didn’t immediately comment when contacted on Monday.

The shilling depreciated to a record intraday level of 116.92 per dollar on May 27, and was quoted at 116.83 by close of day Monday in the capital, Nairobi, according to data compiled by Bloomberg. The shilling has dropped about 3.3% since the start of January.

“Such variance between market expectations and fundamentals on the one hand, versus the actual move in the FX on the other, tends to be an issue in typically thin FX markets where a consistently weakening FX trend and rising external pressure drive more cautious behavior,” Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes, said in an April 26 note to clients.

The brokerage sees the currency depreciating more than 5% to 122 shillings to 123 shillings per dollar by the end of the year.

“It would appear the market is losing confidence in the transparency and effectiveness of our foreign-exchange market,” the manufacturers’ lobby said.

© 2022 Bloomberg

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