Kenya eyes IMF loan to shore up weak shilling

The Treasury is considering tapping into the precautionary loan given by the International Monetary Fund last year to support the shilling, which gained marginally against the US dollar in yesterday’s trading.

Treasury secretary Henry Rotich said the government had not set an exchange rate that would trigger drawing the funds, but was being guided by the causes of the shilling’s depreciation.

“We are currently doing assessment to see causes of the volatility and if we see indeed the causes are consistent with what we had anticipated we shall draw,” said Mr Rotich.

Kenya borrowed Sh64 billion from IMF in February this year fearing the economy’s vulnerability to shocks arising from growing integration into global markets, insecurity, extreme weather changes and huge imports for infrastructure projects.

READ: Kenya inspires demand for IMF credit across Africa

Mr Rotich attributed the recent depreciation of the shilling to poor performance of the tourism sector amidst a wave of insecurity and a decline in horticulture earnings blamed on inadequate rainfall. This has created a solid diagnosis for drawing the loan funds. 

The shilling has ceded 6.3 per cent to the dollar since the beginning of the year. The Central Bank said it would scale up its participation in the open market to tighten liquidity and support the shilling a move that is likely to result in higher cost of cash.

Yesterday, traders told Reuters of CBK selling dollars in the open market to prop up the shilling.

READ: Shilling gains on dollar sale, CBK vows to ‘stem volatility’

Deputy CBK governor Haron Sirima said the closure of hawalas, considered to be key transmission points of diaspora remittances, had not impacted the shilling nor had the lack of a substantive head at the institution.

Diaspora remittances, averaging more than Sh10 billion monthly, have become a key foreign exchange earner for Kenya.

“The bank also enhanced the prudential guidelines of banks on foreign exchange dealings to promote transparency and safeguard the integrity of the financial market,” the CBK said.

Dr Sirima said there were no signs of malpractices in the market, adding that the tight monetary stance had minimized any likelihood of arbitrage between the interbank and foreign exchange market.

Arbitrage, trade meant to take advantage of different prices for the same asset in two markets, was cited as a key factor in the shilling’s 2011 slump when banks borrowed from central bank and used the money to take positions against the shilling.

The shilling’s weak performance has also been attributed to dollar outflows as multinationals operating locally repatriate profits to parent companies and dividends are paid to foreign investors. There has also been a marked exit of foreign investors from the Nairobi Securities Exchange with most said to be headed to the Nigerian bourse.

Kenya Bankers Association moved to calm the market with a statement stating that the shilling’s decline was partly due to the global gain of the dollar following recovery of the American economy.

“We are mainly an importing country so demand for the dollar would be high but the dollar has also been appreciating, which is not unique to Kenya,” said Habil Olaka, the association’s chief executive.

The Nigerian naira has depreciated nine per cent to the dollar, Uganda shilling (9 per cent), Tanzania shilling (4 per cent), Ghanian cedi (20 per cent) and the Euro 11 per cent.

The huge import bill has resulted in a widening of Kenya’s trade deficit further weakening the shilling. Kenya’s current account deficit rose to 10 per cent of GDP.

“Measures to promote exports, including foreign direct investment are critical to the long term stability of the exchange rate,” said Dr Sirima.

Analysts expect the shilling to continue being under pressure due to panic buying and end-month demand.

“Shedding is further anticipated with anticipated end month demand set to commence over next weeks,” said Genghis Capital. Central Bank is expected to be more aggressive in protecting the shilling given the inflationary pressures further depreciation may bring to the economy.

Central Bank is holding foreign currency equivalent to Sh652 billion ($6.8 billion) a war-chest that it can use to defend the shilling in the open market.

The Treasury application for the IMF loan is part of measures taken to prevent a recurrence of the shocks that hit the economy following the depreciation of 2011.