CBK forex reserves steady in August after months of decline

Central Bank of Kenya (CBK) forex reserves stabilised in August after months of decline, helped by the relative stability of the shilling, reducing pressure on the regulator to sell the market dollars to support the currency.

Data from CBK shows the reserves only fell by $8 million in the month to $6.392 billion, compared to July when they fell by $224 million to $6.434 billion largely on sale of dollars in support of the shilling.

In August, the shilling–dollar exchange rate was devoid of the volatile movement that had been seen in July. Currency traders said the tight liquidity in the money market during the month kept the volatility in check.

“Under such market conditions, selling dollars would not have been necessary. We have seen the regulator preferring to use liquidity mop-up as the primary control for volatility,” said a commercial bank dealer.

Mopping up the shilling, which makes it scarce, under some conditions forces dollar holders to dispose of them and acquire shillings.

In addition to currency support, forex reserves are also used in external debt repayment, while they can also be impaired by valuation losses when the local currency weakens against the dollar and other hard currencies.

READ: Kenya’s foreign currency reserves drop $1bn in seven months

Interventions in support of the shilling have been limited since the Central Bank must balance them against the risk of depleting the reserves especially at a time when there is heavy demand for dollars to fund capital goods imports for important infrastructure projects against limited inflows.

The current reserve levels are equivalent to 4.05 months of import cover, just on the borderline of the minimum requirement of four months cover.

The cover had fallen progressively during the first seven months of the year (from 4.85 to 4.07 months cover) in line with the reduction in reserves, which declined by $991 million over the period.

Analysts had warned that the cover would have fallen below the minimum requirement had the Central Bank continued to draw on the reserves at the same rate as in July.

In terms of effect on currency however, deviations from the statutory cover are not considered alarming unless they go on for months.

In its meeting last month, the Monetary Policy Committee had also said there are indications of some recovery in tourism and agriculture, and the possibility of increased foreign direct investment which are key in bringing in foreign exchange that could boost the reserve levels.

Since the beginning of this month however, the shilling has broken out of the relative stability to the dollar, weakening by Sh3 to the 106.60 level.