CBK Governor Njuguna Ndung’u when he appeared before a committee probing the depreciation of the shilling in January last year. The bank spent Sh36 billion trying to fight off fluctuations that came with the jitters surrounding the March 4 General Election, reducing the cushion for the Kenya shilling. Photo/File
What you need to know:
The reduction has left the reserves covering only 3.75 months of imports, the lowest since the week ending March 16 in 2012.
The CBK is mandated by law to maintain forex reserves at four months of import cover, calculated as the average of the past 36 months.
Deviations from the statutory cover are not considered alarming unless they go on for months.
Foreign exchange reserves have consistently fallen since early this year to hit the lowest level of import cover in 12 months.
The Central Bank of Kenya (CBK), which manages the reserves as part the monetary policy, spent Sh36 billion of the money trying to fight off fluctuations that came with the jitters surrounding the General Election. That reduced the cushion for the Kenya Shilling as the CBK attempted to smoothen fluctuations in the market.
The reduction has left the reserves covering only 3.75 months of imports, the lowest since the week ending March 16 in 2012 when the ratio stood at the same level.
As at the end of last week, the forex reserves stood at $4.953 billion, $416 million lower than at the beginning of the year when it stood at $5.369 billion which amounted to 4.21 months of import cover.
The level of reserves decreased from week to week after that going to down to an import cover of 3.78 months at the end of January and then to 3.76 months of the same cover as February drew to an end.
The CBK is mandated by law to maintain forex reserves at four months of import cover, calculated as the average of the past 36 months. However deviations from the statutory cover are not considered alarming unless they go on for months.
For Kenya, the reserves have been below the statutory limit since the last week of January, but the situation is seen as disconcerting because the shilling remains exposed to the high level of the current account deficit fluctuating at nine to 10 per cent of the gross domestic product.
Citigroup Global Markets believes that the current account deficit will continue to put pressure on the shilling even after the conclusion of the General Election.
“Once the election is past, it should then continue to weaken modestly given the large current account deficit and the slowness in bringing the fiscal deficit under control,” said the Citi report shortly before the election was done.
CBK governor Njuguna Ndung’u has recently stated that the monetary authority cannot use the reserves to target a certain exchange rate as it is unlikely to undertake the task successfully, and it may lead to speculative attacks like has happened in countries that attempted to do so.
“The CBK therefore provides the policy environment on the exchange rate and cannot target a particular level or direction of the exchange rate. Some market segments have, on certain occasions, misrepresented the CBK’s participation in the market as if it intended to defend a particular level or direction of change of the exchange rate. This is not true,” said Prof Ndung’u.
The governor insisted that CBK’s participation in the foreign exchange market is usually aimed at stemming excessive volatility in the movement of the exchange rate.
“Supporting a specific level or direction of movement of the exchange rate in a liberalised foreign exchange market with an open capital account is neither sensible nor achievable,” said Prof Ndung’u.
He added that “once a country opts for a floating exchange rate with an open capital account, it cedes the power to defend a specific level or direction of the exchange rate.”
