Central Bank sells Sh6.4 billion forex to shore up shilling

Central Bank of Kenya building in Nairobi. Photo/FILE 

By GEOFFREY IRUNGU

In Summary

• The CBK sold forex to the market but says the depreciation factors were temporary.

Central Bank of Kenya (CBK) spent Sh6.4 billion ($73 million) to shore up the shilling since the start of last month even as the bank and other market players maintained the currency would soon recover to its natural balance.

 

The CBK sold forex to the market but says the depreciation factors were temporary.

“There was increased volatility… mainly attributed to high demand for foreign exchange from corporates repatriating dividends… The bank therefore, sold foreign exchange and stepped up open market operations to stabilise the exchange rate,” the CBK said in its May 30 update.

CBK governor Njuguna Ndung’u said last week that the currency was only slightly out of line with its norm, dismissing the argument advanced by one expert that the shilling should be at between Sh90 and Sh100 to the dollar.

The expert, who has worked with the CBK for many years, had told the Business Daily that he believed the defence of the shilling was not justified as the currency ought to be weaker due to the current account deficit, the difference between the values of the exports and imports.

Prof Ndung’u said the argument was misplaced as the currency only gets up to five per cent misaligned from its natural position, meaning that it keeps on recovering to its equilibrium position.

READ: CBK sees shilling rebounding after Eurobond sale

The expert, who did not want to be quoted in order to speak candidly, pointed to the huge imports that have put the current account deficit at nearly 10 per cent and the fact that Kenya was running a fiscal deficit nearly eight per cent — much higher than the target five per cent — meaning that the country was printing extra currency to meet some of its budgeted expenditures.

“We have plenty of shillings in the market due to the State’s domestic borrowing to meet our fiscal deficits. This causes an imbalance with the foreign currency. Again, our current account deficit means there is a lot of demand for dollars in order to import,” said the expert.

Prof Ndung’u said the movement of the shilling was a reaction to current economic developments arguing that its value was an automatic stabiliser of the economy given that Kenya does not have capital controls.

“We have found that the shilling exchange rate has a misalignment of up to five per cent, plus or minus. The argument that the shilling should be Sh90 and Sh100 is not based on what we have observed,” said the governor in an interview on the sidelines of a conference on new CBK laws last week.

KCB Group chief executive Joshua Oigara said he expected the shilling to be range-bound at Sh85 to Sh86 to the greenback in the coming weeks and months as it regained its strength.

“We are bullish about the shilling. We don’t see much danger of the currency getting much weaker since the economy is relatively strong,” said Mr Oigara last Friday.

He said he expected the local unit to trade at Sh85-86, an appreciation of 2.3-3.4 per cent over the current average of about Sh88 exchange rate to the dollar.

This would remove pressure from the importers of goods and services whose costs will fall. “The inflation target is on track, other fundamentals have not changed. That is why we remain bullish on the shilling,” Mr Oigara said.