Tuesday, April 26, 2022 / 5:41 AM PM / by Business Daily / Header image credit: Dawn
Business Daily reports that the Central Bank of Kenya (CBK) has ordered commercial banks to ration dollars following a US currency shortage and race to protect reserves, hitting manufacturers and importers of general goods .
A number of forex traders and importers say banks have imposed a daily cap on dollar purchases as businesses struggle to secure enough foreign currency to meet their obligations.
This has forced manufacturers to start looking for dollars in advance as the shortage is straining supplier relationships and the ability to negotiate favorable prices in spot markets.
The shortage is the product of increased demand for dollars driven by increased shipments of raw materials and equipment in the wake of the economic recovery and local companies paying dividends to foreign investors.
A top CEO of an industrial conglomerate in three capital-intensive industries, including cement manufacturing, says his business is limited to a daily cap of $50,000 (about 5.78 million shillings).
The CBK has also been keen to avoid huge panic buying of dollars and protect reserves amid the global outlook which has deteriorated in recent months following Russia’s invasion of Ukraine, soaring prices oil and other commodities as well as continued concerns over the resurgence of Covid -19.
“Previously, a purchase transaction in USD (dollar) took one business day. However, due to the daily cap, manufacturers must now plan 2-3 weeks in advance, depending on dollar requirements for specific shipments. Mucai Kunyiha, president of Kenya Association of Manufacturers (KAM), said via email.
“Planning foreign currency payments in advance has resulted in an increase in working capital.”
Several bankers admitted to the caps on dollar purchases but refused to come forward for fear of reprisals from the CBK.
KAM said the lack of access to adequate hard currency negatively affects their ability to settle their obligations to foreign suppliers in a timely manner.
The industrial lobby says the crisis has strained relations with suppliers, at a time when competition for raw materials has intensified globally due to rising demand amid persistent constraints of the supply chain.
He believes that the shortage is now driving up the cost of doing business and causing forex panic buying.
The manufacturers are among the biggest importers in Kenya.
Data kept by the CBK, for example, shows that materials ordered by importers last year amounted to 399.62 billion shillings, only eclipsed by machinery and transport equipment valued at 512.45 billion shillings. shillings.
“We now need to start placing orders a month or two earlier to get our deals done on time,” said the CEO of a major manufacturing company who did not want to be identified for fear of being punished by the CBK.
The makers’ concerns confirm earlier revelations from US lender JP Morgan, which issued a client alert on March 22 that it was struggling to complete some client transactions in Kenya due to dollar liquidity constraints.
“Clients are advised that due to ongoing issues with sufficient US dollar liquidity in the Kenyan market in recent days, client requests for Kenyan shilling repatriation through JP Morgan’s AutoFX program may be delayed” , JP Morgan said in the alert.
“Liquidity constraints can cause delays in the execution and completion of foreign exchange transactions.”
The situation is made worse by the weakening of the shilling against the dollar, which means that buying foreign currency is much more expensive for businesses.
It also means companies hedge against further weakening by hoarding dollars or tightly guarding their reserves of greenbacks.
The shilling averaged 115.59 shillings to the dollar on Friday after depreciating 113.13 shillings at the start of the year and 104.44 shillings at the end of March 2020.
Local demand for dollars has increased significantly this year, alongside surging imports following the full reopening of the economy, which has triggered pent-up demand for consumer goods and capital goods.
Rising oil and food import costs due to the ongoing war between Russia and Ukraine have also put a strain on the country’s currency stocks.
Bankers also attributed the liquidity difficulty to increased outflow of funds for the payment of dividends to foreign investors at the Nairobi Stock Exchange (NSE) ticker symbol: NSE.
“They [CBK] must start letting banks freely set the price of currencies without fear of a backlash. They should also start selling more dollars in the market than they currently do,” said an economist at a leading bank with operations in several African countries.
“Kenya’s dollar shortage is one of the worst in Africa.”
Foreign exchange reserves hit $8.485 billion last Thursday, the highest since Jan. 20 when they stood at $8.715 billion, and enough to cover 5.04 months of imports, according to data released by the bank. central.
Analysts and traders said controls on dollar trading are now “rooted” in Africa and not limited to Kenya.
They added that several central banks on the continent are using their grip on the foreign exchange markets to “restrain the outflow of dollars and as support for their local currencies”.
“My company has operations in Ghana and Nigeria and a lot of currency controls have been put in place,” an analyst said.
Central Bank of Kenya orders banks to ration scarce dollars
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