Kenya shilling gains as foreign reserves hit Sh663bn

Money Markets

Foreign currencies held by the Central Bank of Kenya increased by Sh8 billion ($90 million) as the shilling gained against all major currencies. PHOTO | FILE  NATION MEDIA GROUP

By GEORGE NGIGI, gngigi@ke.nationmedia.com

In Summary

• CBK says a stronger shilling is pegged on the drop in international oil prices, which are expected to push down the import bill thereby easing the pressure on the shilling.
• Remittances into the country from Kenyans working abroad have also been growing.
• Analysts have however pointed at the current account deficit as a source of the weakness of the local unit.

Foreign currencies held by the Central Bank of Kenya increased by Sh8 billion ($90 million) last week as the shilling gained against all major currencies.

As at the end of last week, foreign exchange reserves stood at Sh663 billion ($7.295 billion), compared to Sh655 billion ($7.2 billion) the previous Friday.

The accumulation of dollars by the CBK pushes the value of the shilling up due to the resultant high demand of the local currency. Last week, the shilling traded at an average of Sh91.35 to the dollar compared to the previous week’s Sh91.41 units per dollar.

“Liquidity management has provided support to the shilling which strengthened marginally to gain 0.02 per cent against the US dollar,” said analysts at Genghis Capital.

Monday the shilling ceded ground to the dollar to trade at Sh91.40 to the greenback compared to Sh91.15 on Friday. Late last month, the CBK had indicated its expectation for the shilling to appreciate against foreign currency.

The regulator’s expectations went against those of dealers and analysts who pointed at the fundamental weakness of the shilling arising from an ever-widening trade deficit.

READ: Shilling stuck in a tight range against dollar

“The central bank has been aggressive in the money market, mopping up excess liquidity, thereby occasioning resilience in the local unit,” said research firm, Stratlink Africa in a note to investors.

The CBK has however said a stronger shilling is pegged on the drop in international oil prices, which are expected to push down the import bill thereby easing the pressure on the shilling. Oil imports constitute nearly a third of the country’s total import bill.

READ: CBK backs cheap oil imports to shore up shilling

The current foreign reserves holdings are equivalent to 4.7 times the Kenyan monthly import bill compared to the statutory four month cover. The CBK is also banking on increased cash inflow into the country to prop the shilling. The bank is opening the sale of a 12- year infrastructure bond of Sh25 billion next week.

Remittances into the country from Kenyans working abroad have also been growing. The monthly average sent home from the diaspora last year was $119 million (Sh10.8 billion) compared $107.5 million (Sh9.8 billion) in 2013.

Analysts have however pointed at the current account deficit as a source of the weakness of the local unit. Kenya, being an net importer, suffers when its current account is weak.

The poor performance of traditional foreign exchange earners of the country have raised concerns over the shilling. Tourism has been performing below expectations due to security concerns while the value of exported agricultural goods has been down due to low production combined with the fall in international commodity prices.