Foreign reserves held by commercial banks rose by $519 million (Sh53.6 billion) in the year to February 2017, indicating uncertainty over the shilling’s exchange rate.
Latest Treasury data contained in the economic and budgetary review for the quarter ending March 2017 shows the amount of foreign reserves held in banks by the end of February stood at $2.45 billion (Sh240 billion), compared to $1.94 billion (Sh197 billion) a year earlier.
Investors and institutions anticipating a weakening of the shilling tend to accumulate dollars so as to avoid paying more for the greenback in future.
“It shows that there was pessimism about the local currency—projections that the shilling would come under pressure. The most pronounced period of accumulation normally comes after the budget is revealed, which gives an indicator of current account and budget deficits,” said ABC Capital corporate finance manager Johnson Nderi.
At the same time, the country’s official forex reserves, held by Central Bank #ticker:CBK, went down by $91 million (Sh9.2 billion) to $7.48 billion (Sh770 billion) in the one year period, showing the effect of CBK’s dollar sales in the market to control currency volatility, coupled with interest payments on external debt.
The official reserves have, however, rebounded since February, to hit $8.5 billion, reflecting dollar inflows from external debt by commercial, bilateral and multilateral lenders.
Banks had brought down their holdings towards the end of 2016 to $2.02 billion, in line with a steady shilling that had remained flat through the year.
They, however, set off on another round of dollar accumulation at the beginning of this year after the shilling depreciated by 1.3 per cent in the first two weeks of January to a 15-month low of 104 units.
The CBK had responded to this fall by actively selling dollars to the market — largely to banks — to stem volatility.
The currency has, however, stabilised in the second quarter of the year, settling at the 103 to 103.50 level to the dollar.
Going forward, the political risk associated with the August General Election is likely to come into play, which could push individuals and corporates to buy up more dollars as a hedge.