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Treasury may diversify dollar reserves to shield shilling

An employee checks dollar bills inside a money changer. Photo/REUTERS
An employee checks dollar bills inside a money changer. The shilling slumped to a historic low of 107 against the dollar in October from an average of 82.1 in January, making it second worst performing currency globally after the Belarusian Ruble. The Treasury has hinted at broadening the composition of the Kenya’s foreign exchange reserves to stabilise the shilling against major world currencies. Photo/REUTERS 

The Treasury has hinted at broadening the composition of the Kenya’s foreign exchange reserves to stabilise the shilling against major world currencies.

A broader base would open the door for the Central Bank of Kenya to hold reserves in emerging currencies like the Chinese renminbi—the yuan —and India’s rupee given the increasing level of trade with the countries.

The shilling has lost of over 28 per cent in the value of the shilling against the US dollar in the last six months.

Kenya is a net importer of commodities led by oil and steel and loss of value of the shilling means that importers spend more shillings on imports, which increases the cost of production and consumer prices.

Finance minister Uhuru Kenyatta said “the country may soon be forced to convert part of its foreign exchange reserves into a more stable currency.”

He said this on Tuesday while briefing parliament on measures Treasury was taking to stabilise the value of the shilling against major world currencies.

Kenya foreign exchange reserves are denominated in the US dollar, the euro, UK pounds and the Japanese yen, according to the Central Bank of Kenya. Growing trade between China and Africa has seen Nigeria convert a tenth of its reserves into the yuan.

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Nigerian Central Bank Governor Lamido Sanusi said during a visit to Beijing last month that 10 per cent of the countries $33 billion reserves would be held in the yuan.

Standard Bank Group, Africa’s largest bank by assets has also launched services for trade settlement in yuan in 16 African countries, including South Africa, Nigeria, and Angola.

The European debt crisis and the sluggish growth of the US economy have resulted in reduced confidence in western currencies, thus affecting other currencies in the developing countries that peg their exchange rates against the dollar and euro.

Foreign exchange reserves held by the Central Bank of Kenya stood at $3.7 billion as of last Friday, equivalent to 3.46 months of imports.

The Central Bank of Kenya did not confirm what percentage of the reserves is held in what denominations.

A study done by the Standard Bank Group last year projected that increased acceptance of the yuan as a reserve currency would see at least 40 per cent or 100 billion dollar of China’s trade with Africa being settled in the unit by 2015.

The study, “BRIC—Africa: the redback’s rise is an opportunity for Africa”, also suggested that at least 10 billion dollar of Chinese investment into Africa will be denominated in yuan over the same period.

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