Shilling’s fall sets stage for renewed inflation pressure

The gap between Kenya’s earnings from exports and the national import bill had widened to Sh290.1 billion by the end of March, piling pressure on the shilling.

The current account deficit revealed in the latest quarterly report by the office of the Controller of Budget, shows a 54.4 per cent deterioration in the balance of trade for the first quarter of 2012 from the same period last year - meaning that local demand for dollars is on the rise.

The Treasury has partly attributed the shilling’s fall to high demand for dollars by companies with foreign ownership that are repatriating end of year dividends.

On Thursday, the Central Bank sold an undisclosed amount of dollars, lifting the Kenyan currency by more than one unit to trade at 86.40 but dealers said the rate was only temporary because the interventions were not sustainable.

To moderate excess liquidity in the money market during the week ending May 23, the Central Bank mopped up Sh10.5 billion through the repo market and Sh5.1 billion through sale of foreign exchange in the interbank market.

“The regulator seems to have decided to fight volatility with more dollars after realising that the few dollars they were selling were not making much impact,” said Solomon Alubala a senior trader at Cooperative Bank.

READ: CBK battles to calm market as shilling weakens

The shilling is also reeling from widespread dollar strength as investors seek safety in dollar-denominated assets by dumping the Euro.

Dickson Magecha, a trader at Standard Chartered was quoted by Reuters saying that banks had also increased their search for dollars because customers were panic buying. “They want to lock in before it goes higher,” he said.

Importers are also hedging their positions by increasing their dollar reserves to avoid losses associated with a weak shilling when importing raw materials.

Some traders said importers were taking forward hedge contracts since the drop in Treasury Bill interest rates had reduced the cost of hedging.

Market analysts said that the yield on government debt would continue to fall in response to the decline in inflation.

The yield on 91-day Treasury bills declined to 9.8 per cent at last week’s auction from 20.79 per cent tagged on similar paper sold on January 12.

The 182-day bills slid to 10.9 per cent last week compared to more than 20 per cent in January.

Fred Mueni, the director of Tsavo Securities, said that the three-month Treasury bill rate is unlikely to fall below 9.8 per cent, adding that most of the people buying government debt now are small players.