Sh56bn forex reserves drop hurts the shilling

Kenya shilling dollar
Some analysts say the CBK had intervened to stead the currency. FILE PHOTO | NMG 

Kenya’s foreign exchange reserves fell by Sh56 billion in May putting pressure on the shilling that averaged 101.38 units to the dollar at the opening of markets yesterday.

On May 24, the shilling weakened above 101 units for the first time since April 11 when it stood at 101.00. The depreciation came as the reserves fell to Sh908 billion ($8.955 billion), which is equivalent to 6.05 months of import cover, the Central Bank of Kenya said in its weekly update on markets.

At the end of April, the reserves were Sh964 billion ($9.509 billion) having steadily risen since Kenya obtained Sh200 billion ($2 billion) in cash after the floating a sovereign bond in global markets.

Last week alone, the reserves fell by about Sh10 billion ($100 million). Some analysts indicated that the CBK had intervened to stead the currency.

“The shilling slipped against the US dollar in the week to close at 101.40 level on rising end-month corporate demand. The CBK intervened in the market mid-week with dollar sales to support the home currency,” said investment bankers at Genghis Capital.

The greenback reserves were equivalent to 6.36 months of import cover at the end of April, well above the statutory four months and the 4.5 months recommended level under the East Africa Monetary Union Convergence Criteria. Countries in the region are supposed to hit the level within the next five years.

The pressure on the local currency reached a peak last week with the exchange rate standing at 101.56 before appreciating marginally to 101.38 yesterday at market opening.

Reuters reported the shilling was exchange at 101.30/50 as at 11.30am, stronger than Thursday’s close of 101.40/60 before the closure of markets last Friday for a public holiday.

Quoting traders, the news agency said the appreciation was “supported by increased dollar liquidity from offshore investors meeting importer demand.”

Commercial Bank of Africa also reported that the local unit began to appreciate last Friday as a result of weak corporate and interbank demand.