Dollar Liquidity Constraints
The exchange rate has long been a sensitive issue, with most choosing silence for fear of reprisals from the central bank.
The persistent US dollar shortages might be triggering the emergence of a parallel exchange rate.This is common in developing countries. Some governments respond to a balance of payments crisis by creating a dual foreign exchange market for financial transactions.
The objective of a parallel exchange rate is to avoid the effects of a depreciation of the trading rate on domestic prices while conserving some level of control over money outflows and international reserves.
It should be noted that extensive controls on foreign exchange restrict access to official markets and thus leads to the emergence of an illegal parallel market.The illegal market then grows in importance as the authorities respond to a deteriorating balance of payments by tightening and extending exchange controls.
The risk here is that we are slowly creating a parallel shadow market with unwanted consequences.
The current shortage of dollars is triggering the emergence of parallel exchange rate that has seen lenders buying and selling well above the printed official rate, the biggest importers of goods, are purchasing the dollar at more than Sh120 compared to the central bank’s official exchange rate of 116.81
The volatility in the exchange rate market has slowed dollar trading among lenders or interbank deals, further worsening the scarcity of the currency.
The scarcity has forced industrialists to start seeking dollars in advance, further increasing their working capital.
The shilling was exchanging at an average of Sh116.71 units to the dollar based on CBK official rates, having depreciated from Sh113.13 at the start of the year and Sh104.44 at the end of March 2020.
Hest for dollars locally has gone up notably this year in line with streaming imports following the reopening of the economy, which has unleashed repressed demand for both consumer and capital goods.
The lack of access to adequate hard currency is negatively affecting traders’ ability to settle obligations to overseas suppliers in a timely manner.
In conclusion the dollar shortage is causing an increase in the cost of doing business as well as panic buying of forex.