Shilling likely to strengthen, Central Bank survey shows

Nearly two-thirds of Kenya’s 43 commercial banks expect the shilling to strengthen in 2012, a market perception survey by the Central Bank has showed.

About 25 (60 per cent) of Kenya’s banks and 71 per cent of the non-bank businesses surveyed by the banking industry regulator said the shilling would appreciate by at least three per cent this year, compared to 53 per cent of banks in October and 32 per cent of the non-banks that expected the shilling to strengthen.

The banks believe the shilling will strengthen due to reduced demand for foreign exchange from importers due to higher interest rates, regular interventions in the forex market by CBK and less pressure from food imports due to improved rains.

Foreign currency inflows from NGOs and investors seeking to benefit from high interest rates are also expected to boost the shilling, but the bankers cite “uncertainty in the resolution of the eurozone debt crisis” as the biggest risk to the shilling’s stability.

Euro crisis

In its statement released last week, the Monetary Policy Committee (MPC) cited the direction of Kenya’s balance of payment and euro crisis as factors likely to impact most on the shilling this year.

“Balance of payments pressures and their potential impact on the exchange rate are major risks. In addition, the continued turbulence in the global financial markets due to the debt crisis in the eurozone presents a potential risk to the exchange rate,” said the MPC in a statement.

The shilling has been trading below the 90 units level against the dollar since the turn of the year following aggressive monetary tightening measures taken by the Central Bank.

Unlike last year when the regulator was criticised for not taking action in the market to support the battered shilling, the central bank has been in the market every day since the beginning of the year mopping up billions of shillings through repurchase agreements (referred to as repos) and selling an unspecified amount of dollars.

On Friday, the shilling closed at the 87.50 units range. The weakening was attributed to increased demand from the energy sector.
“Due to demand from the energy sector it had dropped to 87.75 before CBK mopped up Sh4 billion using repos, leading to a gain to 87.40 before reverting to the closure mark,” said Bernard Omenda, a dealer with KCB.

He said the Central Bank’s action of holding its rate at 18 per cent was in line with market expectations hence there was no much reaction.

CBK aggressiveness in the market follows disbursement of an IMF loan which boosted its currency reserves by 143.7 million US dollars.

The CBK has raised the CBR in its last four policy setting meeting in efforts to prop the shilling and rein inflation and decided to halt the action so as to let the increments permeate through the economy.