IMF signs off Sh8bn to help stabilise the shilling

The International Monetary Fund (IMF) has signed off the Sh65 billion ($610.7 million) cautionary lending facility it offered Kenya early this year – handing the Central Bank of Kenya fresh fire-power in its battle to save the shilling.

The IMF board made the decision during its executive board meeting held on Wednesday, making available an extra Sh8.06 billion ($76.3 million) besides the Sh56.4 billion ($534.4 million) that was signed off in January, but is not yet drawn.

The latest decision brings to Sh65 billion the total amount so far approved for Kenya.

IMF Resident Representative in Nairobi Armando Morales said Kenya had access to the cash, but had not yet faced any major shocks to warrant drawing it.

“Approval means that the resources are available for Kenya in the event of a major shock, but so far it hasn’t been released because large shocks have not materialised,” Mr Morales said.

The final tranche of Sh8.06 billion ($76.3 million) is expected to be approved during the January meeting of the IMF board.

Once the final amount is approved, it will bring the total amount committed under the precautionary lending programme to Sh73 billion ($687 million) – the total amount agreed under the deal.

The Kenya shilling has in the past six months faced persistent pressure against the dollar and has depreciated 13.9 per cent in the past eight months, having opened the year at 90.78 units to the dollar.

The depreciation has been attributed to a high import bill relative to exports, constrained forex inflows amid a tightening of global markets couple with demand for dollars from Kenyan corporations.

Big infrastructure projects, including the standard gauge railway, are also seen as contributing to the shilling’s troubles due to the huge requirements for imported materials.

READ: Central bank rate tightening in Kenya appropriate: IMF

The depreciation of the shilling has occasionally forced the Central Bank of Kenya (CBK) to intervene in the money market with limited amounts of foreign currency.

The CBK has, however, avoided wide-scale intervention for fear of encouraging speculative attacks on the shilling, but has backed its efforts with moral suasion that has seen it ask bankers to refrain from attacking the shilling and thereby exposing the entire economy to turbulence.

On Wednesday, Treasury secretary Henry Rotich said the shilling had depreciated well beyond what had been budgeted for in terms of debt repayment.

“We had budgeted for 95 to 96 units to the dollar in terms of debt repayments, but the shilling has gone beyond 100 units to the dollar. Obviously this has increased our external debt burden in shilling terms,” said Mr Rotich.

He said Kenya would consider drawing the funds from the IMF given that the debt repayment obligations had increased with the weakening of the local currency. Half of Kenya’s Sh2.7 trillion public debt is supposed to be repaid in foreign currency.

“In terms of access to the precautionary IMF facility, we are going to do our assessment of balance of payment needs and if there is a need for a drawdown, then we will make a case for it,” the minister said.

The IMF had earlier said Kenya had done the right thing by tightening monetary policy to curb wild depreciation of the local currency and anchor inflation expectations. On September 8, the shilling slid to nearly Sh107 to the dollar -- the lowest since October 12, 2011.

The shilling has since last week calmed to about Sh105.5/106.00 to the dollar but some analysts remained pessimistic as to whether the CBK’s limited intervention and moral suasion are enough to stop turmoil in the foreign exchange market.

Some bank CEOs and Treasury managers have agreed with the CBK that there is an element of speculation by some fellow bankers, driven by the quest to make quick returns in the forex market.

The CBK has asked the bankers to avoid betting against the shilling and limit their forex transactions to less than 10 per cent of their core capital. That effectively is supposed to stop deep-pocketed forex holders from betting against the currency in the market.

Controls on the amount of foreign currency that can be traded at any particular time were introduced in the middle of the crisis that faced Kenya’s financial markets in late 2011.

The CBK also appears to have drawn lessons from the 1997-98 period when several Asian countries, including Malaysia, faced serious forex outflows after some foreigners – including dollar billionaire and hedge-fund manager George Soros – sank their currencies by betting against them.

The IMF said that Kenya should also closely monitor corporate borrowing in foreign currency as it could impact their balance sheets.

Such loans become expensive to repay, meaning that they become a bigger liability with increased depreciation of the local currency.

“Efforts to strengthen supervision of banking groups operating outside Kenya are also welcome in light of the rapid expansion of Kenyan banks abroad. The recent exchange rate volatility puts a premium on monitoring corporate borrowing from abroad,” said the IMF.

However, the Bretton Woods institution did not discuss with the Kenyan authorities any caps on companies’ borrowing overseas.