Taming the dollar as regional currencies take a beating

Nairobi, Kenya (Capital Markets in Africa):- The strengthening of the dollar against other currencies has sent East Africa central banks back to the drawing board, after enjoying two years of stability, according to The East African News.

The Newspaper further reported that Central banks are now making plans to protect their shillings from a free fall that has already induced inflationary pressure and increased the cost of servicing debts for governments and corporates.

As a result of currency depreciation,  the Monetary Policy Committee of the Central Bank of Kenya announced that it had called an emergency meeting for Thursday, in the wake of the shilling hitting a low of 98.95/99.05 to the dollar, a level last seen in November 2011.

That meeting could lead to a tighter stance that would make loans more expensive, going against the government’s push for cheaper credit. Ideally, the meeting should have been held in July, but concern over the falling shilling led to an earlier date being set.

On a the same note, Tanzania announced that it is changing rules on how much foreign currency lenders can hold in a bid to end the speculative trading in its shilling, while Uganda has increased its benchmark lending rate.

By Friday, the Kenya shilling was trading at 97.75 against the dollar; analysts warned it could create new risks for regional economies and companies.

Meanwhile, the Tanzanian unit is trading at a low of Tsh2,068.90, while the Ugandan currency is at Ush3,042, levels last seen in August 2011. By contrast, the Rwandan currency has gained one per cent against the dollar to trade at Rwf688.5, from Rwf722.58 in early May.

In an interview with Bloomberg, Kenya’s Central Bank Deputy Governor Harun Sirima said that the MPC will be meeting to review recent developments in the market.

“Following significant changes in some key macroeconomic indicators, we will meet to, among other things, consider appropriate policy action to keep inflation within the targeted path,” Dr Sirima said.

Bank of Tanzania director of economic research and policy Joseph Masawe said they have reduced commercial banks’ net open position from 7.5 per cent to 5.5 per cent of liabilities, in order to reduce the amount of foreign currency banks can hold as well as limit their activities in the interbank market.

“We are also going to raise the statutory reserve requirement from 8 per cent to 10 per cent of total deposits from the start of June so as to remove speculative tendencies,” Mr Masawe said.

This year, Tanzania’s currency has fallen by 16 per cent against the dollar. In the first quarter, Tanzania sold $339 million to support the shilling, reducing its foreign-currency reserves to $4.1 billion from $4.4 billion at the start of the year.

Kenya’s shilling has fallen by 5.26 per cent this year. By the end of April, the Central Bank had sold $563.65 million, reducing its foreign reserves to $6.86 billion from $7.2 billion in February.

George Bodo, the head of financials at Ecobank Capital Kenya, said the global strengthening of the dollar and the expectation of interest rate hikes by the Federal Reserve System are among factors driving depreciation across the region.

“There are also structural issues, with the key one being the continued weakening of the foreign exchange-earning capacity of the economies, with export earnings increasingly financing a declining proportion of imports,” Mr Bodo said.

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