High liquidity holds shilling above 102 against US dollar

US dollars at a forex bureau. FILE PHOTO | NMG 

By CHARLES MWANIKI
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A liquidity flush money market coupled with end-month dollar demand have helped keep the shilling above the 102 level against the greenback this week.

The interbank rate, which offers a measure of how much banks are in need of cash, has dropped to a two-and-a-half-month low of 2.48 percent.

The dollar demand from importers has balanced out supply, with the shilling trading at an average of 102.21 yesterday afternoon compared to Wednesday’s closing average of 102.17.

“The forex market witnessed the entry of dollar sellers taking advantage of the higher rate…but dollar appetite from corporate and interbank players was nonetheless evident,” said Commercial Bank of Africa in a treasury note.

Government payments to its departments, agencies and contractors are partly driving up the liquidity, with the Treasury looking to implement a presidential directive to accelerate the payments whose hoarding has hurt businesses.

Domestic debt maturities have also pushed up liquidity, especially now that the government’s appetite for new borrowing has abated as the fiscal year winds down and after the recent sovereign bond issue that netted the exchequer Sh210 billion.

Latest CBK data shows that liquidity in the banking sector has been on an upward trend this year.

The banking sector liquidity ratio stood at 51 percent at the end of April, which is the highest level since May 2017. It stood at 49.1 percent at the beginning of the year.

Liquidity ratio measures how much high-quality assets a financial institution is holding to fund cash outflows for at least 30 days.

Lenders have been partly to blame as well for the high liquidity at hand due to reluctance to lend to the private sector on account of the rate cap on loans, which has been in place since September 2016.

The annual growth of credit to the private sector stood at 4.9 percent by the end of April, CBK data shows.

Although this is the highest growth rate since August 2016, it remains well below the 12-15 percent that the CBK considers optimum to fuel healthy growth of the economy.