Foreign currency reserves rebound to $7bn after January slide

Foreign currency reserves last week rebound to the $7 billion level after declining in the last two weeks of January.

Central Bank of Kenya (CBK) data shows the official dollar reserves rose by $40 million (Sh4 billion) last week to stand at $7.016 billion (Sh721.9 billion) or 4.47 month import cover from $6.976 billion.

The reserves had declined in the last two weeks of January, coinciding with the heightened end-month demand for dollars from the private sector looking to settle payments to suppliers.

The decline came after a period of sustained increase between November and December when CBK bought dollars from the market as well as the proceeds of a $600 million syndicated loan taken by the government in October.

READ: Kenyans raise forex deposits by Sh31bn to tame imports bill

The stable currency and balanced liquidity have, however, seen CBK reduce its activity in the money markets, resulting in a net liquidity withdrawal of only Sh800 million last week.

“The monetary regulator was absent from the money market on Friday as liquidity in the money market was square. The local unit marginally firmed against the dollar as foreign demand for the dollar and foreign inflows remained relatively subdued,” said Genghis Capital in a fixed income market report.

CBK did not reply to queries on the source of the dollars that pushed up the reserves last week, although traders said that there were some inflows from the tea sector, tourism and foreign investors looking to buy government securities.

The regulator normally takes advantage of a weaker dollar to the shilling to buy some dollars to build up reserves.

A commercial bank dealer said it was unlikely that the January decline would be sustained given the shilling has not been under pressure, which would have made it necessary for the regulator to sell some dollars to banks.

Banks quoted the shilling at 101.85/95 to the dollar in Monday’s trading, strengthening from Friday’s closing rate of 102.05/15. CBK’s mean indicative rate Monday stood at 102.13, from Friday’s 102.16.

“In the next week we expect to see tax remittances and the settlement of International Air Transport Association (IATA) transactions between travel agents and the airlines tighten liquidity, which is likely to strengthen the shilling,” said the forex dealer.

“Further strengthening may provide another opportunity for CBK to buy some market dollars.”

In mid-October, the reserve levels had fallen below the required four months import cover at $6.25 billion (Sh639.5 billion).

This was after CBK sold dollars several times in support of the shilling, which in the second quarter of the year had experienced volatility to fall to the 106 low against the dollar.