Parallel exchange system is Hyperinflation Glooming? A dual exchange rate is an instrument created by a government where a currency has a fixed official exchange rate and a separate floating exchange rate that applies to specific commodities, sectors, or terms of trade. Floating exchange rates are usually determined by the market in parallel with the official exchange rate. Different exchange rates are designed to help stabilize the currency during necessary devaluations. ( Investopedia)
During economic shocks that lead to investor capital flight, a dual exchange rate regime can be used to relieve pressure on foreign reserves. It is hoped that such a system would also ease inflationary pressures and allow the government to control foreign exchange transactions.
Economic scorecards for countries with parallel exchange rate markets are often abnormal in the wrong way. High and chronic inflation, sluggish growth, and poor control of corruption are common characteristics of this group. Capital controls, often introduced or tightened in response to adverse shocks or significant deterioration in economic conditions, have given rise to parallel markets. But regardless of the context or underlying cause, the lack of publicly available FX is the immediate cause of the emergence and persistence of parallel or black markets, and the results are often distorted.
More disturbingly, parallel markets are emerging.
Importers are struggling to import goods because they cannot get dollars at the official exchange rate of about 116 shillings per dollar, forcing them to trade at 120 shillings, the Kenya Manufacturers Association, an industry lobby group, said on Monday. shillings or more to buy. In a statement, it said the lack of foreign exchange supply could create “a parallel shadow market with undesirable consequences”.
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The weaker shilling against the dollar made the situation worse, meaning it was much more expensive for companies to buy foreign currency.
It also means companies are hedging the risk of further weakening by hoarding dollars or tightening their reserves.
Local demand for the U.S. dollar has increased significantly this year due to higher imports following the full reopening of the economy, which has unleashed pent-up demand for consumer goods and capital goods.
The shilling fell to a record low a day after the bank raised interest rates for the first time in nearly seven years. USD/USD fell as much as 0.3% to 117.18 before paring losses to 116.82 at 2:50pm, but little changed. in Nairobi.
Mohamed Abu Basha, head of macroeconomic analysis at investment bank EFG Hermes, said in an emailed response to questions that the shilling is likely to depreciate further due to rising imbalances as Kenya’s current account comes under pressure. EFG expects the currency to end the year as low as 123 shillings per dollar.
“A lot depends on how quickly these imbalances are corrected,” Abu Basha said. “The more they are delayed, the greater the risk of shillings, which could lead to greater volatility in the currency.”
The manufacturers’ lobby said a shortage of dollars was forcing some importers to buy foreign currency outside the official market.
“We believe this difference will lead to shortages,” the association said. “Exporters and other companies that hold dollars are reluctant to sell dollars at lower prices because they have a clear and visible view of the currency’s market value.”
