Liquidity tightens as CBK fights to stabilise shilling

Liquidity in the money markets further tightened last week as Central Bank of Kenya (CBK) mopped up a net of Sh15.3 billion to offer crucial support to the shilling against the US dollar.

CBK reported in its latest weekly bulletin it drew out of the market Sh68.5 billion while injections stood at Sh53.2 billion.

The liquidity withdrawal was mainly through the transfer of taxes held by commercial banks, at Sh32 billion, and maturities of reverse repurchase orders (repos) worth Sh13.8 billion.

Reverse repos involve commercial banks receiving cash from the CBK using their holdings of Treasury bills as collateral, meaning that their maturity results in a cash transfer to CBK.

“The money market was relatively tight during the week, on account of maturing securities under Central Bank of Kenya short term liquidity support to banks (reverse repo maturities),” said CBK in the bulletin.

The average interbank rate — at which banks borrow from each other on emergency basis — currently stands  7.1 per cent, having risen from 4.1 per cent a month ago.

The volumes traded per day have also gone up, rising to Sh115.3 billion last week from Sh80.1 billion the previous week.

The tight market is expected to persist through this week, especially on tax remittances.

“We expect an illiquid environment this week as statutory corporate tax payments are met,” said Genghis Capital analyst Churchill Ogutu.

Indicative of tight liquidity, the cash reserves held by commercial banks at the CBK have fallen in recent weeks. The lenders are required to keep 5.25 per cent of their total customer deposits with the CBK for prudential purposes — to mitigate the risk that comes with all cash being held only in the individual financial institutions.

The CBK bulletin shows that at the end of last week, the lenders held only Sh3.1 billion in excess of the required level, compared to Sh13.1 billion a month ago.

READ: Turbulent start to 2017 for Kenyans as shilling slides

In a market where liquidity is normally skewed in favour of large banks, smaller lenders facing cash shortages have to resort to either the interbank market, the repo market or rediscounting (sell back) their treasuries at a punitive cost.

Last week, the CBK showed that Sh4.9 billion worth of T-bills were rediscounted, the first time investors have done so since July last year.

The tighter market, combined with the CBK dollar sales, has helped the shilling show a slide that has seen it depreciate by 1.4 per cent against the US dollar since the beginning of the year, exchanging at 104 units.

The reserves stood at $6.94 billion (Sh721.8 billion) at the end of last week, compared to $7.06 billion (Sh734.24 billion) in the previous week.

“The reserves level declined during the week to 4.55 months of import cover, from 4.62 months of import cover, the previous week, indicating that the Central Bank used reserves worth $114  million to support the shilling this week,” said Cytonn Investments in its weekly market wrap.

The depreciation of the shilling may also have contributed to the fall in the value of reserves through revaluation.