Depreciation of the shilling has been partly blamed on a global appreciation of the dollar. PHOTO | FILE
What you need to know:
The amount was five times more than what was sold in previous month.
Central Bank of Kenya has disclosed that it sold dollars worth Sh25 billion in April to support the shilling.
The amount was more than five times what the lender of last resort sold to banks the previous month, underlining its determination to rein in the flagging currency.
“The CBK sold $263 million directly to commercial banks in line with the CBK’s exchange rate policy,” read a report by the monetary policy committee covering the bank’s activities for six months to April this year.
Previously, the bank has declined to disclose the amount used to intervene in the foreign currency market, arguing that its participation was aimed at reducing the sudden depreciation or appreciation of the shilling.
The market has largely been relying on movement of the foreign reserve holdings to determine whether CBK was supporting the shilling by directly selling dollars.
Reserve numbers are, however, also affected by settling of debt and revaluation gains and losses, depending on movement of other foreign currencies against the dollar.
The report shows that in March the regulator sold $43 million (Sh4.1 billion) to dealers, just before the shilling started spiralling towards Sh100. Pumping of dollars in the economy has the impact of increasing supply to cut its price.
The strong intervention by CBK in April indicates that the shilling could have suffered a greater loss hurting households more, due to the country’s reliance on imports.
The interventions, however, left CBK reserve position weaker which could advise the government to tap into the standby credit facility approved by the International Monetary Fund earlier this year.
“Steady decline in Central Bank’s usable foreign exchange reserves and months of import cover explains, in part, the weakening of the shilling. We note, however, that Central Bank has hinted at deploying proceeds from the IMF precautionary loan secured in February 2015 towards propping the shilling,” said research firm Stratlink in this month’s economic report.
At the beginning of the month, CBK foreign reserves were at $6.7 billion which is equivalent to 4.3 times of the country’s monthly import bill.
This was down from $7.1 billion, an import cover of 4.6 months, at the end of March. The country is required to hold a minimum reserve equal to four times its import bill.
CBK was also active in the market during the month of May, helping the shilling remain below the psychological Sh100 mark. CBK was criticised during the slump of the shilling in 2011 when it touched lows of Sh107 to the dollar.
The shilling traded at 98.20 units to the dollar on Friday down from 97.90 the previous day.
Depreciation of the shilling has been partly blamed on a global appreciation of the American currency.
However, the dollar has weakened sharply globally after the Federal Reserve committee hinted at a gradual rate hike in the coming months as inflation rises towards their target level.
CBK raised its indicative rate earlier this month in a special meeting convened to respond to movement of the exchange rate.
The committee charged with setting the rate was expected to meet next month, but moved forward their sitting to tame the shilling.
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