Markets & Finance

Shilling weakens as IMF says currency overvalued

CASH

The International Monetary Fund (IMF) says the shilling is overvalued by five to 10 per cent. PHOTO | FILE

The shilling weakened on Friday as banks covered short dollar positions, companies sought foreign exchange for end-of-month payments and the IMF said the shilling was overvalued.

By 0728 GMT, commercial banks quoted the shilling at 92.05/25 to the dollar against last Thursday’s close of 92.00/10.

“We are approaching the end of the month so there is end of the month demand and whatever inflows there were for the (government infrastructure bond) they were quickly absorbed,” said Sheikh Mehran, head of trading at I&M Bank.

Companies seek dollars to meet regular payments, which often weighs on the shilling at month-end.

This week, the shilling was supported by a government bond issue that was oversubscribed, drawing offshore investor interest.

“92.50 is on the cards now,” said Mehran. Traders said some banks had taken short dollar positions to meet expected demand for shillings by the offshore investors, but were now unwinding those positions and seeking dollars too.

They said remarks to Reuters this week by the International Monetary Fund representative in Kenya that the shilling was overvalued by five to 10 per cent added pressure.

The IMF’s Armando Morales said a weaker shilling would make Kenya more competitive, although he said there was no need for a policy shift as the shilling was likely to gradually slide.

Meanwhile, Kenya’s central bank said last Friday it planned to mop up Sh10 billion in excess liquidity from the money markets using repurchase agreements and term auction deposits.

Mopping up excess liquidity makes it more costly to hold dollars, which partly lends support to the shilling.