Markets & Finance

CBK dollar reserves down Sh10.7bn on revaluation loss, forex sale

dollar

The shilling exchange rate to the dollar has gone from an average on Sh89.35 at the end of October to Sh90.17 on November 25, 2014. PHOTO | FILE

Dollar reserves held by the Central Bank of Kenya have dropped by Sh10.7 billion ($119 million) since the beginning of the month, reflecting the direct sale of the currency to the market in support of the shilling and a revaluation loss.

According the latest CBK weekly bulletin, the dollar reserve levels stand at $6.97 billion (Sh620.33 billion) representing 4.54 months of import cover, down from $7.09 billion (Sh631.01 billion) at the end of October which represented 4.68 months of import cover.

This is the first time the dollar reserves have slipped below the $7 billion (Sh623 billion) mark since mid September.

CBK has sold dollars directly into the money market thrice over the past two weeks in support of the shilling, although the actual amounts dealt remain undisclosed.

CBK sales have come at a time when the shilling exchange rate to the dollar oscillated between Sh90.30 and Sh90.50.

Last week, CBK sold dollars on consecutive days (Thursday and Friday), which saw the shilling gain temporarily to exchange at Sh89.75/95 to the dollar in Friday’s early trading before slipping back to close at an average of Sh90.10.

“We have not seen them selling dollars so far today. With the current reserve levels, CBK still has sufficient muscle to support the shilling this way,” said Bank of Africa treasury trader Robert Gatobu.

Mr Gatobu said that selling dollars should, however, not be continuous when fundamentals are at work.

“It may not be prudent in terms of monetary policy to continue intervening by selling dollars whenever the shilling weakens, especially where weakening is being driven by fundamentals,” he said.

Banks had the shilling slightly weaker to the dollar on Monday, at Sh90.15/20 in the afternoon, while CBK’s mean indicative rate was Sh90.17 from Friday’s Sh90.10.

The dollar has been strengthening globally, with the gains resulting in a drop in the valuation of Kenya’s foreign reserves which are held in dollars and other hard currencies.

READ: Shilling crosses Sh90 mark as banks eye CBK

The shilling exchange rate to the greenback has gone from an average on Sh89.35 at the end of October to Sh90.17 on Monday.

Other than selling dollars, CBK has been more active on mopping up excess liquidity from the market, which has also helped prevent a volatile movement in the exchange rate.

On Monday, the regulator was in the market to mop up Sh5 billion using repurchase agreements (repo) and term auction deposits, ending up taking Sh2.5 billion.

According to Mr Gatobu, the prevailing sentiment in the market is that the currency will weaken further, with dollar demand continuing to outweigh supply which has been constrained by reduced inflows from tea, tourism and horticulture.

He said that with the current market fundamentals, the shilling is likely to trend towards the Sh91 level to the dollar, albeit gradually.

CBK reserves could however be set for another sharp increase once the Treasury starts drawing down the loan funds towards the Standard Gauge Railway from China —depending on how fast the Treasury moves to convert the money into shillings.

Treasury Secretary Henry Rotich said on Friday that they expect to start receiving the funds within the next two weeks.

He had earlier told Parliament that the drawdown, by the end of the year, could be up to 40 per cent of the Sh327 billion coming in from China.

In the first three weeks of September CBK bought the bulk of Eurobond dollars from the Treasury helping push up reserves by more than $1 billion (Sh90 billion) to an all-time high of $7.4 billion (Sh652.9 billion), representing 4.85 months of import cover.