Central Bank mops up Sh24 billion to bolster shilling

The Central Bank of Kenya (CBK) has sold to banks dollars worth Sh9.3 billion and mopped up a total of Sh24 billion through re-purchase agreements since the beginning of the year, showing its determination to prop up the shilling above the 90 unit level to the dollar.

The regulator disclosed in its weekly reports dated January 13 and January 6 that it had sold dollars to banks worth Sh9.2 billion and Sh2.5 billion respectively while it has been in the repos market nine times.

The regulator has been taking out liquidity through the repos market and selling dollars to support the shilling, which has fallen nearly three percent against the greenback this year.

On Tuesday, commercial banks traded the shilling at 85.60/80 against the dollar, up from Monday’s close of 86.80/87.00.

Currency dealers told Reuters that tax payments which are due this week are likely to further squeeze liquidity in the market, helping the shilling gain more as market participants cut their dollar positions.

“There has been a slow build-up of dollar positions and now that the post-holiday demand has petered out, banks will start cutting those positions,” a senior trader with a leading commercial bank told Reuters.

CBK’s official foreign exchange reserves declined by $54 million partly due to the sale of $ 73 million to mop up excess liquidity in the money market, the CBK said.

The regulator saw its foreign exchange reserves drop from $3,872 million (equivalent to 3.49 months of import) as at January 9, 2012 to $3,818 million (equivalent to 3.44 months of imports) in the week ending January 12, 2012.

The shilling was trading at 107 in mid October last year in what critics said was due to laxity on the part of the regulator.

The currency rallied after policy makers adopted an aggressive monetary tightening stance, raising its benchmark rate to 18 per cent in December, but the currency has been losing its earlier gains.

The CBK left its key policy lending rate unchanged during the January 11 policy meeting in order to monitor changes in inflation.

Dealers at Commercial Bank of Africa said the shilling could touch 88 in the coming days.

“We expect the shilling to trade in the range of 86 and 88 against the dollar as demand is still higher that supply,” said Duncan Kinuthia, head of markets at Commercial Bank of Africa.

Traders said demand is expected to mount as the month-end nears with the corporate sector seeking dollars to meet their foreign exchange obligations.

Foreign companies whose financial year ends in December normally repatriate their profits during the first quarter of the year.