CBK spends Sh51bn in four months to prop weak shilling

The Central Bank of Kenya (CBK) foreign exchange reserves have contracted by Sh51 billion ($545 million) in the past four months as dollars were used to shore up the shilling and for debt servicing. A revaluation of the reserves as the shilling weakened also affected the war chest.

Forex reserves stood at Sh646.7 billion ($6.88 billion) last Friday down from Sh697.95 billion ($7.425 billion) as at end of last December according to the monetary policy authority. The reserves had risen from below $5 billion on the back of a $2.75 billion sovereign bond raised last year.

The local currency exchange rate has already touched Sh95 to the greenback, the lowest level since November 2011.

“Foreign reserves have been declining on account of revaluation losses … large external government payments, elevated foreign exchange demands from the private sector leading to periodic interventions in the foreign exchange market,” said the CBK in response to Business Daily queries.

The CBK however declined to provide a breakdown of how much was used and for what purpose.

It said the reserves were still above the four-month statutory import cover and added that it was not out to use the forex to defend a particular exchange rate but was merely smoothing out volatility.

“The Central Bank of Kenya pursues a market determined exchange rate policy and at no time has it defended a particular Kenya shilling exchange rate. …Its participation in the foreign exchange market is aimed at reducing volatility, that is, sudden depreciation or appreciation in the Kenya shilling exchange rate,” said the CBK.

Besides the global strength of the dollar, analysts say the current dividend-payment season is affecting the value of the local unit because investors are repatriating cash abroad.

UK citizens, who own major stakes in listed multinationals, were to repatriate Sh25 billion in dividends for the financial year 2014.

READ: British companies ship out Sh25bn in 2014 dividends

The depreciation spells boom times for exporters as they receive more shillings for every dollar worth of goods sold to foreigners. But it also penalises importers who have to buy more expensive goods in the international markets.

The CBK might spend more forex in stabilising the local currency as market players said its fundamentals pointed to a weakening bias in the coming days.

“We have seen the CBK come into the market to inject dollars in the past, but what is happening generally is that the shilling has a bias for weakening,” said Sheikh Mehran, senior trader at I&M Bank.

Mr Mehran pointed to the global strengthening of the dollar and corporate demand as well as repatriation of dividends by foreign companies as factors weakening the shilling.

Analysts in investment advisory business also concurred with the argument on the repatriation of dividends but added that confidence in the wake of terrorist attacks was also affecting the local unit.

“The depreciation was as result of increased local dollar demand from the corporate sector, driven by companies paying dividends to foreign shareholders and lower investor confidence in the shilling, which has arisen due to the recent insecurity,” said financial advisory firm Cytonn Investments in a dispatch to investors.

The decline in the value of the local unit has surpassed expectations of some of the analysts who had predicted the shilling would close the year at between Sh92 and Sh94 to the greenback.