CBK says it’s holding enough reserves to cushion shilling

The Central Bank of Kenya headquarters in Nairobi. Photo/FILE 

By GEOFFREY IRUNGU, girungu@ke.nationmedia.com

In Summary

• The industry regulator said it is holding Sh549 billion in hard currency reserves, which is equivalent to 4.4 months of import cover.
• The statement came after the shilling breached the Sh88 barrier as pressure mounted from the demand side.
• CBK forecast the shilling would appreciate when the Eurobond is floated next month.

The Central Bank of Kenya (CBK) Monday said it was holding enough reserves to cushion the shilling despite a recent slide blamed on dividend repatriation by foreign shareholders.

The industry regulator said it is holding Sh549 billion in hard currency reserves, which is equivalent to 4.4 months of import cover.

The statement came after the shilling breached the Sh88 barrier as pressure mounted from the demand side, a growing trade deficit and rising government spending.

CBK forecast the shilling would appreciate when the Eurobond is floated next month. The Treasury has said it will sell the bond early next month.

“The increased pressure on the Kenya shilling is attributed to seasonal factors as corporations pay out dividends to external shareholders,” said CBK. The phenomenon of outflows during dividend payment periods had been observed around this period in the previous years, it noted.

READ: CBK sees shilling rebounding after Eurobond sale

Just before the shilling fell to trade at more than Sh88 to the US dollar, market players had warned that weak inflows from tourism and pressure from importers would precipitate a depreciation, especially after the government increased its spending.

Being the second last month of the government’s fiscal year, May is the month when most State agencies and departments go on a spending spree, increasing liquidity in the market.

Accounts of commercial banks at the CBK, one indicator of the shilling’s supply levels, showed that deposits exceeded the legal minimum by Sh1.18 billion for the week ending last Thursday.

In the previous week, the deposits had exceeded the limit by over Sh13 billion meaning there had been a substantial draw down.

Interbank lending rates, another indicator of local currency liquidity, fell to 7.54 per cent in the week ending May 21st from 8.03 per cent in the previous week.

As a way to reduce the shilling’s liquidity in the market, CBK reported in its Weekly Statistical Bulletin dated May 23rd that it had mopped up Sh21 billion from the market in the previous five working days through repurchasing agreements (Repos), a form of borrowing, and the slightly longer-dated term auction deposits (TADs).

“The money market was relatively liquid in the week ending May 21, 2014, supported by repo maturities and government payments. The Central Bank liquidity management withdrew net liquidity of Sh21.0 billion through repo securities and Term Auction Deposits,” said the bulletin.

In a report, Reuters said that the CBK had tried to limit the amount of local currency in the market yesterday by seeking to buy Sh3 billion worth of shillings through TADs.

“Kenya’s central bank on Monday sought to mop up three billion Kenyan shillings ($34.17 million) of excess liquidity from the money markets by using term auction deposits (TADS),” wrote Reuters.