CBK Governor Kamau Thugge at pains to explain performance of Kenya shilling

Central Bank of Kenya (CBK) Governor Dr. Kamau Thugge was at pains to explain the performance of the Kenya shilling against other currencies when he faced the Public Debt and Privatisation Committee of the National Assembly.

Members sought to know what the government was doing to stabilise the currency after the CBK Governor revealed that in the past four months, Kenya's foreign debt had risen by over Ksh.382 billion; a figure expected to rise further if the shilling dwindles.

Committee Vice Chair Makali Mulu said: “The issue of the exchange rate is actually a major concern for this country and I think you need to come out more strongly and advice on what needs to be done because these are issues under your domain.”

Wajir East MP Aden Daud posed: “Is it a good policy for us to allow the market forces to dictate the value of the shilling in the short term, or what is the cost benefit analysis of us trying to prop up the shilling instead of the market forces vis a vis the debt burden?”

Thugge responded; “What we are doing to address is fiscal consolidation, we have engaged investors, we are engaging development partners with the expectations of inflows, we are doing something about it…”

The committee members were alarmed by a further admission that currency appreciation was resulting in a rise in the debt stock, meaning already heavily taxed taxpayers would dig deeper to keep the economy running.

“In four months the external debt and debt service is estimated to have increased by Ksh.382.6 billion in terms of external debt, and in terms of debt service payments an additional Ksh.6.9 billion,” he said.

Although the CBK Governor outlined short term measures to help stabilise the shilling, it seemed the status quo would remain for a while.

“The proximate cause of this depreciation is the high interest rate in the United State…when the US started to fight inflation, it was very aggressive, the inflation was at 9.1% last year, the federal reserve bank has a rate of 2% and they wanted to reduce to the 2% and they raised the federal reserve rates, the impact was the dollars was sucked in into the US,” he stated.

However, the committee was still unconvinced that the government was doing enough in comparison to the East African Community neighbours.

MP Daud posed; “I wonder why the Ugandan shilling has appreciated against the Kenya shillings and why the Tanzanian shilling has appreciated against the Kenya shilling…does that mean its only us affected by the higher interest rates in the US and the regional markets?”

Thugge noted; “If you look at our exports to the GDP ratio, its much lower than Uganda and Tanzania, which means relative to their economy they get more foreign exchange into their economy. Secondly, we are doing great in tourism than Uganda and Tanzania.”

The CBK boss said a further drop in Kenya's tourism fortunes was also to blame for the reduction in foreign exchange.

“This year I think we were projecting tourism seats of roughly USD 1.2 billion…Uganda was at USD 1.1 billion…slightly lower than us…and Tanzania was in the range of USD 2.6 billion. If you take those figures relative to the size of the economy, you can see we are well behind the two nations in terms of even tourism receipts, which come as foreign exchange and help stabilise the dollar,” said Thugge.

The matter got bleaker as Thugge put up a case for what is the state of the economy vis a vis her neighbours.

“This year we are projecting something on the order of USD 775 million, if you go to Uganda they’re expecting something on the order of USD 2.5 billion…that is almost three and a half times what we are getting…of course they have the oil industry and a lot of FDIs going there hence foreign exchange going to their system…again, in Tanzania, they’re getting USD 1.6 billon in FDI, so they are factors explaining the strengthening of their shilling, it started in 2019, the shilling has 27 percent,” he said.

The Central Bank Governor said the government, in order to further fund its activities, is targeting to borrow Ksh.449.2 billion from the domestic market while at the same time mobilising external funding from multilateral institutions, development partners and regional banks as the African Development Bank for cheaper loans and grants.

“When we do get that additional external financing, what happens is that there is a reduction in the domestic borrowing, particularly since now it is quite high…the interest is quite high…we hope to substitute domestic borrowing,” said Thugge.

The Controller of Budget, who also appeared before the committee, revealed that invoices had shown that public debt repayment accounted the biggest chunk of Kenya's expenditure at over 89.3 percent.

The public debt committee intends to conduct a special audit to ascertain Kenya’s financial soundness.