Capital Markets
Dollar breaks above Sh145 as market ignores CBK rate
Thursday March 16 2023
The price of buying dollars in banking halls and forex bureaus has crossed a record Sh145 per unit. FILE PHOTO | SHUTTERSTOCK
The price of buying dollars in banking halls and forex bureaus has crossed a record Sh145 per unit, widening the spread between the official and open market rates, and creating a black market for the US currency due to a shortage.
A spot-check on Wednesday across multiple banks showed that they were selling dollars to customers at between Sh140.55 and Sh144.50 while buying the greenback at between 128.20 and Sh131.40 per unit.
Consumers are buying dollars at between Sh141 and Sh146 per unit in forex bureaus, who are getting the US currency at between Sh135 and Sh138.
These trades are moving further from the Central Bank of Kenya (CBK) average rates of Sh129.52 per unit, widening the gap between the official and open market trading price to Sh16 from less than Sh5 a year ago.
The widening spread has followed the shortage of dollars and the near-collapse of the interbank forex market, where foreign currency is traded among lenders and helped set an exchange rate that is closer to the CBK average.
Read: Dollar crisis earns Kenya banks Sh52bn amid consumer woes
The inability of banks to compare and compete on prices when selling to each other has left buyers at the mercy of sellers, which explains the widening variance in the dollar exchange rate.
Some are also being forced to buy dollars from their clients—depositors hold in excess of Sh920 billion worth of forex in their accounts—offering customers the power to set prices.
A bank executive said that industry players have now opened discussions among themselves and with the authorities, including the CBK, to resolve the dollar supply problem.
The dollar shortage has become an issue of national concern due to the secondary effect of rising consumer prices and potential supply hitches of key imported commodities.
“There are very good discussions in terms of how the interbank market should come back. Industry players are closely involved in these discussions because it’s owned by the banks,” said the executive who sought anonymity.
“We need it to come back because we want a market where there is proper price discovery. Right now, price discovery is with the clients who are holding the dollars, and that should not be the case.”
A black market is emerging in the wake of banks buying the dollars at less than Sh130 and selling the US currency at over Sh140.
Top firms have started trading in dollars among themselves, with hotels and aviation firms attracting interest from those in need of hard currency.
Those with dollars are finding they can get a better rate by bypassing banks and selling directly to individuals and firms in need.
The firms are buying the US currency at lower rates than those quoted by the banks.
This is creating a parallel shadowy market, which is in breach of the law and has the potential to trigger a range of economic problems including discouraging foreign direct investment (FDI), encouraging rent-seeking and reducing the interbank FX market.
A parallel exchange rate market develops in such circumstances and when the spread between the official and parallel rates is both substantial and sustained, says an International Monetary Fund (IMF) official working paper.
The central bank has in the past rebuked Stanbic Bank Kenya after a research note issued by its parent, South Africa’s Standard Bank, said a parallel exchange rate was emerging in Kenya.
This forced Stanbic Bank Kenya to issue a public statement distancing itself from the research note, which said that “two FX rates have been developing in the market.”
The Standard Bank note said that “due to this divergence in screen and FX interbank rates, admittedly price discovery has been very cumbersome.”
The parallel rates are well captured by the exchange rate the energy regulator has been using to calculate the monthly caps on fuel prices.
The Energy and Petroleum Regulatory Authority (Epra) data show the exchange rate that oil marketers—who account for about a third of dollar purchases—used to buy oil was nearly similar to the CBK official rate until May last year.
Read: Dollar shortage mints more forex bureaus
The spread between the official and the oil marketers’ rate was Sh0.16 in May last year before it started widening from July to reach Sh9.65 this month.
The dollar shortage is the product of rising dollar demand being driven by increased shipments of raw materials and equipment as inflows from traditional sources such as agricultural exports and tourism fail to keep up with demand.
Analysts have also blamed the CBK for the dollar crisis, saying the regulator introduced tough rules on the foreign exchange interbank market, crippling market operations.
Through the interbank forex market, banks are able to trade hard currency with each other and at rates that determine the official or spot rate.
A muted interbank market has, for instance, forced banks to seek dollars from companies and individuals, forcing retail transactions to happen at weaker rates.
“Liquidity in the interbank FX market has dried up and shifted to the bank-client market where forex transactions are executed at a much-depreciated rate,” the IMF observed in December.
As spreads between the interbank and market rate widen, banks have shied away from selling dollars to each other on the increased margins on clients’ business.
