Shilling gets cover from rise in foreign currency reserves

CBK headquarters in Nairobi. Foreign exchange reserves stood at Sh493bn, equivalent to 4.3 months of import cover at the end of last week. FILE 

By GEOFFREY IRUNGU 

 

In Summary

• As at the end of last week, foreign exchange reserves stood at $5.8 billion (Sh493 billion), equivalent to 4.3 months of import cover.
• On Monday the shilling traded at 84.90/85.30 to the dollar from Friday’s average of 85.15, as per dealers at African Banking Corporation.

 

Foreign currency reserves held by the Central Bank of Kenya (CBK) have soared above the minimum requirement of four months import cover, providing a crucial cushion to the shilling which last week touched a two-month low against the dollar.

As at the end of last week, foreign exchange reserves stood at $5.8 billion (Sh493 billion), equivalent to 4.3 months of import cover.

CBK data shows the regulator mopped up Sh35.9 billion from the currency market in the six days ending Friday as it sought to stabilise the weakening shilling.

“Against the US dollar, the weakening of the Kenya shilling is attributed largely to increased demand for dollars from importers to meet their end-of-month commitments and payments of dividends by corporate (firms),” the CBK said in its weekly update dated May 31, 2013.

On Monday the shilling traded at 84.90/85.30 to the dollar from Friday’s average of 85.15, as per dealers at African Banking Corporation.

As at last Thursday, the CBK had mopped up a net of Sh20.8 billion but mopped another Sh15.1 billion, raising the total to Sh35.9 billion. Currency dealers said the massive withdrawal of foreign currency liquidity may have added to the pressure on the local unit.

The dollar accumulation raised the import cover to an average of 4.3 months throughout May – the first time in years for the monetary authority to maintain such a level in a month.


The shilling had remained at about 84 units to the dollar for most of the past 12 months.

(Read: Central Bank forex reserves rise above import cover limit)

The CBK noted that the Shilling’s depreciation against major international currencies last week mirrored the past, when demand that comes at the end of the month and dividend payment to foreigners affects the shilling.

The Central Bank Rate (CBR) has fallen by 9.5 percentage points since last July, with latest one percentage point cut early last month to the current level of 8.5 per cent. This has come amid a downward movement in the rates on government paper, which attracts dollar-denominated inflows.

“The CBK has come into the market and last Friday alone, it mopped up Sh15.1 billion without injecting anything. This has slowed down depreciation quite effectively. But there is pressure because demand is coming from many sources: oil sector, infrastructure, dividend payment,” said Peter Mutuku, the head of trading at Bank of Africa.

(Read: Cost of public debt drops with fall in T-bill rates)

Mr Mutuku said CBK’s accumulation of reserves was a source of comfort for the market, even with the current depreciation. ABC Bank in its latest update on forex and money markets said commercial banks – which were short of dollars – were out in the market trying to buy from other banks in order to cover their positions or replenish their dollar portfolios.

“The Kenya shilling slipped on Friday, pressured by importers buying the greenback and commercial banks covering their short dollar positions,” said ABC Bank in the update.

The dealers at ABC said they expected “the shilling to remain under slight pressure.”

 

But some of the pressures on the shilling are likely to be only temporary, said Mr Mutuku.

“Fund managers have been repatriating their dollars because interest rates have fallen. Other pressures are on dividend repatriation or oil demand. Some of these pressures are only temporary. Soon the shilling will be trading on the basis of fundamentals,” Mr Mutuku said.