Shilling dips to 5-month lows on high liquidity

The shilling has slipped to its lowest level against the dollar since the beginning of January, weighed down by higher liquidity in the market on government payments and rising dollar demand from importers.

Commercial banks were quoting the local currency at an average of 102.05 in trading Tuesday, having touched the 102 level for the first time since January 7 in the first trading session of the week.

It had closed last week at 101.54 having been traded in a tight range in the first half of June.

Traders say in recent sessions the appetite for dollars has outweighed inflows, which in recent months have been giving the shilling solid backing in the foreign exchange market.

“We anticipate continued pressure on the shilling owing to improved liquidity, which drives foreign currency demand,” said Commercial Bank of Africa in a treasury note.

The interbank rate has also come down to three percent, from 4.5 percent at the beginning of the month, indicating that lenders have improved liquidity position.

Central Bank of Kenya (CBK) has attributed the rising liquidity to government payments to its departments and agencies, which has offset tax remittances from banks.

Some agencies are also ramping up payments to contractors as the fiscal year comes to a close. Treasury secretary Henry Rotich said in last week’s budget that the government has been executing a Presidential directive to clear pending bills.

“In addition to the payments we have made so far, we have prioritised payment of Sh10.9 billion of the verified pending bills, which will be paid before end of this month,” said Mr Rotich.

There is likely to be more pressure on the exchange rate in the coming week as the market winds down to the usual end-month spike in dollar demand from importers.

Eyes will then turn to the CBK in case there is volatility in the market with the regulator possessing a sizeable war chest of dollars to smoothen out accelerated weakening.