SH10M PENALTIES SOUGHT FOR COMPANIES HOLDING DOLLARS.

As the Kenyan shilling weakens toward the 155 level, suggestions are being made to stop businesses from hoarding hard currency by fining them up to Sh10 million for exceeding “reasonable” demands.

Forex hoarding, which is defined as the accumulating of foreign currency for speculative reasons above and beyond “reasonable” demands, is the subject of a draft Bill introduced by Rongo MP Paul Abuor. However, it does not adequately define what ‘reasonable’ needs are.

The maximum penalty for hoarding dollars for purposes other than paying import fees and travel expenses is Sh1 million, and the maximum jail sentence is 10 years. Businesses and other organizations that are found to be at fault risk having their licenses revoked and fined up to Sh10 million.

According to Mr. Abuor on Wednesday, “the Bill’s purpose is to put measures in place to combat hoarding and to offer support for the Kenyan shilling so that it does not decline further against foreign currencies, particularly the US dollar.”

In light of the nation’s current economic challenges, particularly its unsustainable debt financing, he continued, “Evidence suggests hoarding for speculative purposes and a lack of faith in the Kenyan economy.”

31 percent decline in value

The Bill is being discussed at a time when the local currency has lost more than 31% of its value against the US dollar since the start of 2022 and 20.3 percent of its value this year. The shilling’s exchange rate was stated by the Central Bank of Kenya (CBK) on Tuesday at 148.45 versus the US dollar, a significant decrease from the rate of 123.31 at the end of last December.

However, some commercial banks are selling dollars for as much as Sh155, with Bank of Africa, for instance, selling the hard currency on Wednesday for Sh156.85. The recent devaluation of the shilling was attributed to people and businesses hoarding dollars in anticipation that the local currency would depreciate further against the dollar and other important global currencies. Stockpiling of foreign hard currency deposits has increased, reaching a record high of Sh1.248 trillion at the end of July.

The CBK intervened in March as a result of worries about the stability of the shilling by taking a number of steps, including reopening the foreign exchange inter-bank market and publishing a forex code to regulate transactions using hard currency.

Agreement between governments

The government-to-government agreement on the importation of fuel items earlier this year, which enabled payments on oil shipments in local currency, was one of the additional steps the financial regulator took to reduce the strain on the shilling. President William Ruto praised the local shilling’s prospects during the negotiations, predicting that it would rise to roughly 120 versus the US dollar. The shilling is still down from the exchange rate of 135.91 at the end of April, despite the fact that the local currency’s volatility has decreased in the interim.

This is in spite of an improved balance of payments, which was principally supported by decreased imports, robust exports, and increasing remittance inflows from the diaspora. CBK Governor Kamau Thugge highlighted on Wednesday that the advanced economies’ tightening monetary policies were mostly to blame for the shilling’s problems. He stated that he anticipates recent policy changes, such as improved fiscal consolidation estimates, to lessen the depreciation of the currency.

government takeover

“Not just the Kenyan shilling, but other currencies throughout the world have declined, and portfolio outflows are partly to blame for this decline. We should experience less pressure on the currency rate going forward, given our initiatives, Dr. Thugge predicted. Nevertheless, the Draft 2023 Forex Hoarding Criminalization Bill seeks to eliminate CBK’s role in managing the forex market by creating a new organization called the Forex Management Authority.

The organization will function as a somewhat autonomous regulatory agency under the National Treasury. To maintain the integrity, transparency, and stability of the foreign exchange market, it should be responsible for regulating and overseeing the operations of market players, including forex brokers, dealers, and other pertinent institutions. The Forex Management Authority is responsible for licensing, regulating, and supervising forex brokers and dealers. It also checks for conformity with applicable laws, looks into any infractions, and imposes sanctions where necessary.

The CBK, which earlier compared the proposal to create a new authority to safeguard banking sector consumers to exchanging a well-maintained SUV for a beefed-up Subaru, is likely to oppose the measure. According to the Forex Hoarding Criminalization Bill, those who hold forex would be given a three-month/90-day amnesty before having to convert their holdings into Kenyan shillings or pay a 15% tax. The Bill also includes a whistleblower clause that guarantees protection from reprisal and entitles people who expose forex hoarding actions in good faith to 10% of the amount at issue.

Analysts are still doubtful.

Analysts predict that the shilling will fall even further before the end of the year despite several interventions to stabilize the country’s foreign exchange due to fewer foreign exchange inflows and higher global interest rates.

Low forex inflows and high worldwide rates, according to Stears, a financial and advising organization with a focus on Africa, will increase the cost of imports as well as the cost of servicing dollar-denominated loan debt.

“In the upcoming weeks, it is anticipated that the Kenyan shilling would trade between 146 and 152 to the US dollar. The unit has come under a lot of pressure as a result of the convergence of weaker FX inflows and the US Fed’s tightening monetary policy, the firm stated. By year’s end, according to analysts at EFG Hermes, the official rate for the local currency will be Sh155. “For almost three and a half years, the shilling has been declining. Given the growing current account deficit, low FX reserves, and ongoing global monetary tightening, we believe more weakness is justified, according to Abou Basha, lead economist at EFG Hermes.