Dollar reserves hit an all-time high of Sh653bn

Central Bank has bought the bulk of Eurobond dollars from the Treasury in the past three weeks helping push up reserves by more than $1 billion to an all-time high of $7.4 billion (Sh652.9 billion).

Over the past three weeks, the Central Bank of Kenya (CBK) has raised foreign exchange reserves from $6.3 billion covering 4.13 months of imports to $7.4 billion or 4.85 months of imports cover.

According to CBK, the new level of reserves will help meet any unforeseen market developments, a veiled reference to the slide of the shilling to a three-year low against the dollar.

“The current level of import cover is the largest that CBK has ever attained. This gives the Central Bank and the economy cushion to weather any shocks that affect the economy,” said CBK governor Njuguna Ndung’u in a statement.

The move by CBK to bulk up dollars comes at a time the shilling is under pressure from reduced forex inflows even as demand for dollars grows from manufacturers and for financing capital equipment purchase for large projects.

READ: Shilling drops to 32-month low on importer demand

The conversion of the Eurobond dollars to shillings by the Treasury through sale of hard currency to CBK could be an indicator that the government is set to accelerate spending of the cash.

Kenya initially dipped into the Eurobond proceeds to make payments worth Sh25 billion ($285 million) it owed contractors for various public projects, according to the Treasury secretary Henry Rotich.

The Treasury had stopped paying contractors in the wake of a cash crunch resulting from increased agitation for public sector salary increments and the need to address security issues.

The payment, when combined with that of $600 million towards clearing a syndicated loan, means the government has now spent at least $885 million of the Eurobond proceeds, leaving a balance of $1.115 billion.

Forex market players see the increase in dollar holdings as a positive reassurance in terms of helping CBK control volatility of the shilling and ensuring any depreciation is gradual and manageable.

However, this alone is unlikely to keep the shilling from depreciating further in the near future given the decline is driven by market fundamentals.

“This is a positive move to show that they have enough of a cushion and sufficient reserve to support the shilling. It is necessary to have this kind of reserve, but it is not likely that it will lead to a stronger currency,” said Commercial Bank of Africa senior dealer Joshua Anene.

CBK at times controls a volatile currency market by directly selling the dollar holdings to the market.

Thursday the regulator exercised the option by selling an undisclosed amount to banks as the shilling depreciated sharply to exchange at 89.50/60 to the dollar in morning trades, from an opening rate of 89.25/35.

The sale of dollars, that dealers said was substantial, led to the exchange rate receding back to 89.05/15 by midday.

The direct sale followed nine straight sessions of mopping up excess liquidity through repos that were seen as slowing the fall.

Even as the Treasury lets go of the hard currency proceeds of the Eurobond, it is set to receive new partial inflows once the money for the construction of the standard gauge (SGR) railway starts coming in from China.

Mr Rotich on September 9 said that the ministry expects to meet all the conditions for the release of the cash by the end of this month.
Kenya signed the Sh327 billion railway loan deal in May.