Shilling at risk as forex reserves hit eight-month low
The Central Bank of Kenya in Nairobi. The regulator has in recent weeks been mopping up the shilling from the forex market and selling dollars to banks in a bid to stabilise the currency, resulting in dwindling reserves. File
What you need to know:
Latest Central Bank data shows downward trend from Sh469 billion in December to Sh431bn last week.
The shilling traded at 87.33 units to the dollar on Tuesday after touching a one-year low of 88 units last week.
Analysts say the currency is headed for difficult times due to recent reductions in interest rates and uncertainty over the March 4 elections.
Foreign exchange reserves held by the Central Bank of Kenya have dropped to an eight-month low, putting at risk stability of the shilling against major international currencies.
Latest data from the CBK shows that official foreign exchange reserves declined in the past two months to below the statutory requirement of four months’ worth of import cover.
The reserves have been on a downward trend since the week ending December 12, last year depleting from Sh468.49 billion ($5.4 billion) to Sh431.43 billion ($5 billion) as of last week.
“This means that they (CBK) have little room to manoeuvre, they cannot intervene aggressively at a time when the currency is headed for hard times,” said Chris Muiga, a senior dealer at KCB.
The Central Bank has in recent weeks intensified the mopping up of the shilling from the forex market and selling dollars to banks in a bid to stabilise the currency, but taking a toll on foreign exchange reserves in the process.
Forex reserves held by CBK cushion the shilling from high volatility by assuring importers that there is sufficient foreign currency to pay for imports.
A drop in reserves below the legal limit of four months of import cover diminishes the regulator’s powers to intervene in the forex market in cases where the shilling is hit by speculative trading.
The shilling traded at 87.33 units to the dollar on Tuesday after touching a one-year low of 88 units last week. Finance minister Njeru Githae attributed the weakening to high demand for foreign currency from oil importers and a telecommunications company he did not name.
Analysts said that the currency is headed for difficult times due to recent reductions in interest rates and uncertainty over the March 4 General Election.
“They (CBK) have to choose between low interest rates and a stable shilling,” said Ignatius Chicha, head of treasury at Citibank.
Citi in its market report for last week expressed concern over the country’s deteriorating gap between foreign exchange inflows from exports and the expanding imports basket.
“We continue to be concerned about the wide current account deficit. The aggressive policy easing may contribute to further currency weakness,” Citi said.
Kenya National Bureau of Statistics data indicates that Kenya’s current account deficit deteriorated by Sh42 billion between the second and third quarters of 2012 compared to an improvement of Sh15.6 billion in the same period the previous year.
The fall in the currency has been linked to a reduction in interest rates, a widening current account balance and poll jitters.
Kenya’s neighbours have also had a fair share of their own currency woes with Uganda shilling falling from 1,700 to the dollar in early January to above 2,600 at the beginning of this month.
The Tanzania shilling has lost value against the greenback to trade at above 1,600 units currently from 1,200 in the first week of last month, perhaps indicating that Kenya’s currency plight is more of a balance of payment issue and less of an election matter.
Kenya is also vulnerable to an economic slowdown in Europe and this keeps the risk elevated for renewed weaknesses.
Citi said that this month will also see increased maturity in Treasury bills and bonds amounting to Sh54.4 billion and Sh24.6 billion respectively. This will put pressure on the currency and require spending of reserves to mop up liquidity.
