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Shilling depreciates further on day new forex code takes effect

Shilling depreciates further on day new forex code takes effect
Capital Markets

Shilling depreciates further on day new forex code takes effect

Patrick Njoroge

Central Bank of Kenya (CBK) Governor Patrick Njoroge. PHOTO | DIANA NGILA | NMG

The Kenyan shilling depreciated further on the day the banking sector regulator effected a new foreign exchange code that promises stringent penalties against those caught manipulating the forex market.

Bank executives told the Business Daily in confidence that while they had been expecting a new code to be issued in due course—and had even been participating in its preparation through working groups—the move by the Central Bank of Kenya (CBK) to issue and enforce it came before they had finalised their submissions on the same.

The surprise issuing of the code, they said, had dampened the supply of dollars in the interbank market that had aided the recovery of the shilling from Monday.

Rates quoted for dollar buyers in banking halls on Thursday ranged from Sh136 to Sh143, and between Sh127 and Sh128.60 for those offloading the greenback to banks.

Read: Shilling hits new record low against the dollar

On Wednesday, banks were selling dollars at between Sh136 and Sh142, down from a range of Sh140.55 and Sh144.50 a week earlier.

The CBK’s official rate on Thursday stood at an average of Sh130.99 per dollar, having depreciated from Sh130.61 on Wednesday.

“There were some flows on Thursday, but generally lower than those we saw on Wednesday. We saw some caution after the regulator stamped its authority,” a trader told the Business Daily.

The CBK has kept a keen eye on the forex market following concerns some players had in the past sought to manipulate the market for selfish gains.

But this has in turn been cited as one of the reasons for the reluctance of banks to trade dollars with each other, out of fear of falling foul of the regulator if prices exceeded the expected range.

The CBK said in a statement on Wednesday that its code is modelled on the FX Global Code that currently has 51 signatories, including three African countries—South Africa, Mauritius and Angola—but added that it has been customised as appropriate to the Kenyan context.

The banking regulator said the code will ensure the integrity and effective functioning of the forex market in Kenya.

It prohibits banks from engaging in trading practices, quoting prices or making transactions with the intention of manipulating price movements or disrupting the functioning of the market.

The code also requires banks to immediately conduct a self-assessment and submit to the CBK a report on their level of compliance with the new code by April 30, 2023, and thereafter submit a detailed compliance implementation plan approved by their boards by June 30, 2023.

Failure to comply with the code will see banks face ‘administrative action including monetary penalties as provided for under the Banking Act’.

Read: Year the shilling endured the biggest test yet

The code was issued in a period of heightened attention on the local forex market after the shilling hits new lows of 145 units to the greenback in the retail market and crossed the 130 mark on the official printed rate amid dollar supply constraints that have threatened imports of key economic inputs.

The mounting economic threat posed by the forex question prompted the government to negotiate a deal with Saudi Arabia and UAE to allow imports of fuel on credit, which is expected to ease the monthly demand of about $500 million from the market by oil marketers.

The widening divergence between the market and official rates has also raised fears over the emergence of a black market for dollars.

Meanwhile, President William Ruto said on Wednesday that the government had held conversations through the CBK with players in the sector to reinstate the interbank exchange market, a key cog in the even supply of dollars in the economy.

The President said that he expects the market conditions to improve in the next two weeks, and put on notice those hoarding dollars that they would be looking at losses imminently, signalling that the government expects the exchange rate to come down with the improved supply of hard currency.

Depositors held Sh921 billion worth of dollars in their accounts by the end of December.

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