Eurobond swells forex reserves to Sh1trillion

The Central Bank of Kenya building in Nairobi. FILE PHOTO | NMG 

In Summary

• This has strengthened CBK’s muscle in preventing exchange rate volatility.
• Eurobond loans have proven useful to CBK in boosting its foreign exchange coffers.
• Each of the three issuances has resulted in a jump in the reserves to record highs and been useful in allowing CBK enough headroom to defend the shilling against occasional volatility.

By CHARLES MWANIKI
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Proceeds of the Sh210 billion Eurobond issue have ballooned Central Bank of Kenya (CBK) official foreign exchange reserves to a record $10.06 billion (over Sh1 trillion) strengthening the regulator’s muscle in preventing exchange rate volatility.

The CBK normally buys the foreign currency proceeds of Treasury’s external loans, in turn crediting the exchequer account with the equivalent in shillings for use in the domestic economy.

In addition to the Eurobond proceeds, CBK is likely to buy the $750 million (Sh75 billion) from the World Bank loan the government took last week once it is drawn down.

“The CBK usable foreign exchange reserves were at an all-time high of $10.06 billion (Sh1.01 trillion/6.4 months of import cover) as at May 30, as a result of the government successful issuance of a $2.1 billion Eurobond in May,” said CBK in the latest weekly bulletin.

“This meets the CBK’s statutory requirement to endeavour to maintain at least four months of import cover and the EAC region’s convergence criteria of 4.5 months of import cover.”

Eurobond loans have proven useful to CBK in boosting its foreign exchange coffers. Each of the three issuances has resulted in a jump in the reserves to record highs and been useful in allowing CBK enough headroom to defend the shilling against occasional volatility.

The government also draws on these reserves to service foreign loans.

This year, there are significant maturities and interest payments to be made, meaning that CBK is likely to see a gradual slide in the reserves going to the end of the year.

The $750 million (Sh75 billion) five-year tranche of the 2014 matures later this month, while Kenya will later in the year also begin making payments on the principal of the loans taken from China to build the standard gauge railway.

These reserves are also likely to come in handy to stave off any volatility in the exchange rate that may arise due to the demonetisation of the currency in the shift to new generation bank notes. There are 217.6 million notes of the Sh1,000 denomination set to be phased out by the end of September.