Oct 3, 2022

Mawazo Writing Africa

Writing about the main

Parallel exchange rates in Kenya emerge as dollar shortage bites

The dollar shortage in Kenya is triggering the emergence of parallel exchange rates, with lenders buying and selling well above the printed official rate, the manufacturer lobby warned.

The Kenya Association of Manufacturers (KAM) said on Monday, that its members, the largest importers of goods, bought the dollar at more than Ksh 120, compared to the central bank’s official exchange rate of 116.81 units on Friday.

The lobby reckons Volatility in the exchange rate market has increased the Dollar trade between lenders or interbank transactions slows, and US currency shortages worsen further.

The exchange rate has long been a hot topic, and most stakeholders choose to remain silent for fear of central bank reprisals.

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The central bank has previously rebuked Stanbic Bank Kenya after a research note issued by its parent company, South Africa’s Standard Bank z had stated that a parallel exchange rate was forming in Kenya.

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This forced Stanbic Bank Kenya i to issue a public statement distancing themselves from the research note in which it said that “two exchange rates have developed in the market.”

“Although the formally quoted exchange rate for the US dollar is floating around in the market Ksh115-116, none of our members can access the currency to this price on the market. The real market price is now above Ksh120,” KAM chairman Mucai Kunyiha said in a statement.

“Banks are also unable to trade dollars among themselves, further exacerbating supply constraints. Here there is a risk that we create a parallel shadow market with undesirable consequences.”

In such circumstances, a parallel exchange rate market develops; and if the spread between the official and parallel rates is both significant and sustained, according to an official International Monetary Fund (IMF) working paper.

KAM said the lack of access to adequate hard currency is having a negative impact on its members’ ability to meet obligations to foreign suppliers in a timely manner.

The industry lobby said the crisis has strained relationships with suppliers, while competition for raw materials is intensifying worldwide due to rising demand amid persistent supply have chain restrictions.

The shortage is now believed to be driving up the cost of doing business and FX hoarding. The manufacturers are among Kenya’s largest importers.

For example, CBK data , shows that materials ordered by importers last year totaled Ksh 399.62 billion (US$3.4 billion), dwarfed only by machinery and transportation equipment valued at Ksh 512.45 billion ($4.3 billion).

US lender JP Morgan issued a March 22 c lient warns , that dollar liquidity shortages made it difficult to complete some customer transactions in Kenya.

The shortage has forced industrial companies to seek dollars upfront, further increasing their working capital.

The situation is made worse by the shilling’s weakening against the dollar, meaning it is costing companies much more to buy foreign exchange.

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