Treasury has requested Sh45 billion from IMF to cushion the economy in event of external shocks. PHOTO | FILE
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Finance secretary Henry Rotich said the negotiations had been completed and await approval from the IMF board.
Mr Rotich said the IMF resources would be used in the event of unpredictable external shocks.
Analysts said though the cash would not be channelled into the CBK vaults, it would serve the same purpose of cushioning the local currency from huge fluctuations.
National Treasury has requested the International Monetary Fund (IMF) for a precautionary financial facility amounting to Sh45 billion ($488.25 million).
The facility can only be activated or drawn when a major depreciation of the Kenya shilling occurs or is set to occur. This is unlike the routine financial arrangement where money was transferred to the Central Bank of Kenya (CBK) accounts as balance of payment support.
Finance secretary Henry Rotich said the negotiations had been completed and await approval from the IMF board.
“The government has negotiated a precautionary arrangement with the International Monetary Fund blending the non-concessional stand-by arrangement and the concessional stand-by credit facility (SBA/SCF),” said Mr Rotich.
Mr Rotich said the IMF resources would be used in the event of unpredictable external shocks.
“This new facility, which amounts to $488.25 million…would cushion the economy by providing Kenya with access to IMF resources in the event of exogenous [external] shocks,” said Mr Rotich.
Analysts said though the cash would not be channelled into the CBK vaults, it would serve the same purpose of cushioning the local currency from huge fluctuations.
“The facility is just as good as cash because people in the market will know that it is available to the CBK to use if need be. It means the CBK can use the foreign reserves they have to intervene in the market knowing that it can always draw more cash from the IMF,” said Bobby Otieno, head of Treasury at Ecobank in Nairobi.
Mr Otieno said growth in usable foreign exchange was a welcome development as it would calm whatever jitters might invade the market and predispose shilling to depreciation.
“I believe the CBK would use the facility when the shilling depreciates beyond a certain threshold. The shilling has depreciated since last year but this has been at a slow rate, and therefore not alarming,” said Mr Otieno.
“If it depreciated at a faster rate, then the CBK would have to intervene.”
A forex dealer in another bank who preferred anonymity said that he expected the Treasury and the CBK would be restrained in the expansion of money supply that has potential to cause the shilling to weaken.
“Right now the CBK holds a lot of forex resources, exceeding $7 billion. It may be tempted to increase money supply because it can intervene should the local unit weaken. However, it should be reasonable and not grow money supply too fast. In any case, excess cash will lead to inflation,” said the source.
The IMF has traditionally given Kenya balance of payment support. However, with the $7 billion in usable forex reserves, the Treasury and the Bretton Woods institution agreed that the country does not need the cash facility.
Kenya was on a three-year IMF programme running between 2011 and 2014 under which the country received $760 million in three tranches.
The amount came in handy when the Kenya shilling depreciated to Sh107 to the dollar in mid-October 2011. The shilling slowly appreciated to between Sh85-88 for most of the past three years.
The local unit has, however, been sliding in the past six months to the current Sh91 to the dollar, thanks largely to the strengthening greenback following the tapering of the financial stimulus in the United States.
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