CBK backs cheap oil imports to shore up shilling

Central Bank of Kenya (CBK) has discounted predictions that the shilling will lose against the dollar, citing reduced import bill to contradict Citi and a host of market analysts.

CBK said it is basing forecast of a stronger local currency on the dropping fuel prices that should result in a lower import bill.

Analysts have been betting on a weak shilling owing to low dollar inflows from the conventional foreign exchange earners—tourism and agriculture.

This is the second time in a week that the regulator is responding to international institutions and analysts—the first being on IMF and Moody’s doubts on prudency of loan provisioning in the banking industry.

“The Kenya shilling depreciation against the US dollar has been gradual and has now stabilised with a bias towards strengthening or appreciation,” said the financial market regulator in a statement posted on its website.

On Friday, the shilling traded at 91.4 to the dollar, a marginal decline from the previous day 91.36.

A strong shilling favours the Kenyan economy whose imports hugely surpass exports. Poor performance by tourism industry due to security concerns and low prices of agricultural products against the backdrop of strengthening of the dollar saw analysts predict a weak shilling.

“Our view is that the shilling will trade in the 90-93.50 range to the USD in the short term (30 days) and 89-94 in the medium term (180 days),” research firm Stratlink said in a report released early this month.

“The Kenyan shilling is expected to gradually weaken in the near term. Currency weakness may be driven by US dollar strengthening, lower tourism earnings and a widening trade deficit,” said investment firm Stanlib.

A high import bill results in high demand for the dollar giving it strength over the local currency. Global oil prices have fallen by more than half, slicing the value of oil imports in the country which constitute nearly a third of Kenya’s imports, at 30 per cent.

Central Bank is also taking comfort in high foreign currency reserves arising from cash received in the two sovereign bond sales made last year.

Further, the IMF recently approved a precautionary loan to the government of Sh63 billion to be used to defend the shilling in case of any external or internal shocks.

CBK proactive position is contrary to the laid back stance it took in 2011 when the shilling depreciated to lows of 107 units to the dollar.