CBK signs up for World Bank plan to curb currency swings
Central Bank of Kenya building. Treasury has signed up for a new World Bank-fronted bonds trading plan, aimed at helping the Central Bank of Kenya to diversify its forex reserves mix and cushion the shilling from wild swings. File
Treasury has signed up for a new World Bank-fronted bonds trading plan, aimed at helping the Central Bank of Kenya to diversify its forex reserves mix and cushion the shilling from the wild swings it has been experiencing during times of economic hardship.
The plan, which kicked off early last year, has seen the Central Bank spend $1.05 billion (Sh84 billion) of its reserves in the purchase of foreign currency denominated bonds from the World Bank in an unprecedented move whose full import the market is yet to take in.
Though Njuguna Ndung’u, the Central Bank of Kenya governor, has kept the plan under wraps, buying foreign currency denominated bonds has given Treasury an extra avenue to manage forex reserves that are crucial to meeting the country’s import bills needs and paying foreign debts.
Foreign currency dealers, however, warned that although the plan, dubbed the Reserves Advisory Management Programme (RAMP), could help Kenya benefit from the stability that usually characterises international bonds markets, it also exposes Kenya to huge losses in the event of sudden devaluation of the currencies in which the bonds are denominated.
CBK’s annual report shows that the government has spent $700 million (Sh56 billion) on the World Bank bonds, and has committed to purchase additional fixed income instruments worth $345 million (Sh28 billion) next year.
The transactions are recorded as “foreign liabilities” in the regulator’s balance sheet. CBK said it joined the RAMP programme in March 2009 with the aim of building capacity for investing in international fixed income instruments to diversify its portfolio of forex reserves.
CBK is by law required to maintain a basket of foreign currencies enough to cover four months of the country’s import bill.
Before signing up for the bonds plan, CBK’s forex reserves were mainly denominated in a basket of hard currencies including the dollar, the euro, the sterling pound and the yen.
“RAMP’s objective is to strengthen Central Bank’s capability in the management of a diversified portfolio of foreign exchange reserves,” said CBK, noting that expertise gained will help Kenya invest in fixed income instruments issued by governments of developed economies like US, Germany, France, UK, Japan and Switzerland.
RAMP is built around the model of reserves management by strong emerging economies like China, which uses its huge accumulation of US dollars to shield the yuan from fluctuation.
Having sufficient reserves of major world currencies such as the dollar, euro and Sterling pound, offers importers comfort that they have funds to pay for imports and meet other international debt obligations, thereby cushioning them from any losses they might incur from value erosion.
Kenya’s import bill has grown steadily in the past seven years of rapid economic expansion that has demanded large amounts of capital goods forcing the CBK to resort to buying foreign currency from the local market – a move that has been blamed for exchange rate fluctuation.
Kenya’s forex reserves stood at $3.47 billion (Sh279 billion) on November 19 -- equivalent to 3.52 months of import cover or an average monthly import bill of $986 million.
It also means Kenya is far from meeting the requirement of six months import cover agreed under the East African Community’s (EAC) monetary union plan that is to be realised by 2012.
Samuel Odalo, the group financial controller for Sasini, a tea and coffee exporting company, said management of reserves is critical to the stability of the shilling.
“Exchange rate volatility forces export oriented businesses like ours to revise our budget every six months,” said Mr Odalo. The shilling has traded at a fairly stable rate of between Sh79 and Sh81 against the dollar for most of the past 12 months after plunging from a high of Sh62 in 2008 due to local political uncertainties and the global financial crisis.
Kenya’s imports totalled Sh788 billion last year while exports were valued at Sh345 billion, leaving a gap of Sh443 billion. Oil is the country’s single largest import commodity, accounting for 20 to 30 per cent of the total.
In recent years as rain failures diminished food production, the government has had to dip into foreign exchange reserves to support imports.
CBK currently holds its reserves in cash, bonds, gold and special drawing rights, which is a basket of currencies used by the International Monetary Fund.
Reserves held in cash and bonds amounted to Sh281 billion as at June this year. SDR holdings were Sh26 billion, gold Sh57 billion while reserve position at the IMF stood at Sh1.6 billion.
Largest share
The World Bank started RAMP in 2001 to support member countries in building capacity to manage their foreign currency reserves. It pays interest on the bonds, but also charges countries involved in the programme a management fee.
“Part of the fee earned by the World Bank in this agreement is used to fund the capacity building programme,” said CBK.
Africa accounts for the largest share (a fifth) of the countries that have bought into the programme. Others are countries in the Americas (18 per cent), Europe (16 per cent) East Asia and the Middle East (14 per cent each).
“The engagement also involved the signing of an agreement that allowed the World Bank Treasury to manage a small portion of Central Bank’s forex reserves,” said the CBK, which has through the programme ceded control of nearly 30 per cent of the total official reserves.
As the Chinese strategy has shown, accumulating currencies of another country loosens control over the monetary policy and its success is pegged on the stability of the country in whose currency the reserves are held.
Currency dealers said CBK has intensified its presence in the exchange market in recent months.
“It has been buying hard currency two or three times a week. That is between $8 and $10 million at a time,” said Andlip Nazir, assistant treasury manager at I&M Bank.
Chris Muiga, a senior forex dealer at KCB Bank said the Central Bank will need to carefully manage the build-up of the reserves held at World Bank to avoid upsetting interest rates.
“The Central Bank must use Kenyan currency to buy dollars for purchase of the bonds, and this has implications on liquidity and interest rates. Whatever the central bank does that involves foreign currency affects the currency markets,” said Chris Muiga, senior forex dealer at KCB Bank.
Besides cushioning the country from shocks, the dollar-denominated bonds are usable as collateral in international transactions.
“This would be important in a situation where the country is facing foreign exchange challenges,” said Dyer & Blair Investment Bank research analyst Alexander Muiruri. He noted that the reserves are also key to meeting the State’s external loan repayments. The World Bank did not respond to our queries.
