MAKING SENSE OF THE DOLLAR SCARCITY CRISIS.

Business
1

There is a confusion people have with the status of forex in the country.

THREAD

As of Friday, 10th March, CBK had USD 6.6 Billion worth of forex equivalent to KSh. 851 Billion. This is equivalent to 3.67 months worth of import cover.
On the other hand, as at 31st December 2022 commercial banks had foreign currency deposits amounting to KSh. 921 Billion. This is equivalent to USD 7.1 Billion at current exchange rate. This represents 3.97 months worth of import cover.
Why then is there a shortage of dollars is the question many people ask. There are two things people need to understand;

One is that CBK’s forex reserves are maintained for purposes of debt servicing, government imports and market interventions in case of need to tackle volatility. The law requires CBK to maintain at least 4 months worth of import cover.

Since the reserves are below this legal threshold, there is little intervention CBK can undertake to save the shilling from the current hammering.
The second point is that, the forex deposits held by commercial banks belong to customers and aren’t available for trading.

Banks can only trade with the dollars which they own. The dollars held by customers can only be unlocked if the customer decides to sell them to the bank in exchange for shillings.

So commercial banks fund imports by selling dollars to importers after buying them from customers or CBK.

The high prices of commodities globally due to the pandemic and the Russia-Ukraine war, has caused a situation where the demand for dollars is higher than the supply hence the shortage. We are also having to import food due to drought hence increasing the demand for dollars.

CBK’s reserves can only become available to fund general imports if they are sold to commercial banks. If CBK had enough forex reserves, it could sell dollars to banks and alleviate the shortage.

CBK’s reserves are however also under pressure due to the high debt servicing costs occasioned by our high external debt.

There is also the question of the interbank forex market. Why are banks with enough dollars not selling them to other banks that have a scarcity?
This situation is blamed on stringent conditions imposed on banks by CBK with respect to forex trading.

However, I do not think there are banks with surplus dollars. If there were, then there wouldn’t be a shortage as customers would just flock there and get sorted.

Even if some banks had surplus dollars, the interbank forex market would still not function in times of such a severe shortage. The bank with surplus dollars wouldn’t resist the temptation to steal customers from the banks struggling with scarcity.

I hope this clears the questions people have been asking me about this issue. I know people will still ask what then can be done to resolve the issue but that is a story for another day.

2

Thank you for this basic and simplified explanation of the situation, the only problem we got in here is the infestation of juvenile and primitive street urchins, the likes of @johntez addi gaza msafi and @chap who cannot read anything without a photo of a dirty ass next to it

3

Good… Are you Ephraim Njega?

4

Learnt something new

5

At some point in the future Kenya will start using USD as it’s official currency. Bookmark this post.

6

By Njenga the financial guru forgot to credit

7

The problem with dollar shortage in Kenya is Interbank forex trading curtailment by government. Nothing else.

Banks play a very simple role---- they make a equilibrium of money supply.

In that it takes ( savings) money from rich people the surplus cash and gives it to needy ( as loans, selling money) people thus creating a equilibrium of sort in money supply.

Now banks dont own shillings/dollars ( money) from the first instance , they own money after trading money after sometime.

Example. With 1m deposit a bank can grow it to 2m by giving loans to which 1m will be customer deposit and the other 1m be it’s money.

Now banks have no dollars because they can’t trade in dollars. How are they supposed to create dollars when they can’t trade in them?

If banks were able to trade in dollars between themselves, say equity bank sells 1m dollars to Stanbic. $1m which is customer deposits.

Stanbic repays $1,010,000 in 1 week, you see Equity would have made $10,000 of it’s own. Still would have $1m customer deposit.

This done repeatedly, will stabilize the market.

In every market demand and supply rules should be market driven, but forex market in Kenya is boardroom driven.

When demand of dollars is not meet by supply, as supply rules are government made, scarcity occurs.

8

Can you summarize for us what that fool has copy pasted for us to read

9

OP should acknowledge source

10

Say something on diaspora remittances, does it mean that the likes of @Azor Ahai anakula mashida academic writing himrushii kakitu in USD?

11

But those are individual money. It’s not banks money per say…

Forex money is tricky because you can’t create it from thin air using loans and you need the physical cash if one wants to withdraw yet you don’t print it as a nation.

Example.

  1. Say Engiti has been sent $10,000 from US.

  2. Engiti has $ denominated account with Ekwetee.

  3. CBK account on Fed will receive the physical $ cash/wire cash from JP Morgan sender bank.

  4. CBK will transfer the wire amount to Ekwetee $ account in CBK.

  5. Ekwetee will receive wire transfer from CBK, then credit Engiti $ Account. This is where you negotiate for rate with Ekwetee bank. CBK $ account of Ekwetee will be less $10,000

  6. Engiti will tomorrow go to Ekwetee Kilimani, and say he wants to withdraw $9,000.

  7. Ekwetee has to debit Engiti with $9,000 AND GIVE HIM $9,000 in hard currency.

  8. You see all along Ekwetee did not receive any Hard Currency of $10,000. Just wire cash.

  9. This repeated severally will deplete Ekwetee $ hard currency.

  10. Now opposite of it.

  11. On Tuesday Engiti, goes to Ekwetee Moi Avenue and want to buy a car in Japan. For $25,000.

  12. He will use his Kenya shillings account to pay. His account has 3 million shillings.

  13. Ekwetee Moi Avenue will talk to Ekwetee HQ to ask for $25,000.

  14. Ekwetee will look for $ in it’s CBK $ account and find say they have $50,000

  15. Now to convert the Kes to $ Ekwetee tell Engiti he needs 140 shillings to get 1 $. As in Ekwetee eyes they don’t have enough $ at hand.

  16. Engiti accepts. Shillings amount is deducted from his account, $ account ya Ekwetee is depleted in CBK, and Bank in Japan is credited with the $ in wire.

  17. You see in all this Ekwetee is at disadvantage because first time you took $ from it physically, then you came back looking for $ to pay something in Japan.

  18. Meaning Ekwetee has to be very careful, especially when Engiti comes to withdraw $, because it MUST HAVE physical $ to give to you or else a $ account run can happen when they fail to honor.

  19. Best local example is how Mpesa agent run.

Sometimes they have float unlimited float , sometimes they don’t have more than 10,000.

Sometimes they have float but no cash to give it to you when you withdraw.

But main difference is, forex is using foreign currency which is not readily available, oppose to Mpesa agent in shillings.

But the logic is same

12

Wow, hapo sasa mkuu.
hakuna class ingenifunza ii

13

an argument could be made that we already do

14

Hot air.

15

okay. then explain why there’s always a direct correlation between increase in the usdkes exchange value and the increase in price of literally everything in the kenyan market

16

The idea that banks cannot touch your dollars is bullshit

https://www.youtube.com/watch?v=-09ap6zIB6I

17

They can’t if you live like El Chapo… pesa ndio plaster ya ukuta.

18

very insightful, I now understand something about the dollar issue in our country.

19

Very informative.