Market News

Shilling exposed in IMF absence

KENYA shilling
This week the shilling was exchanging at an average of 100.90 to the dollar. FILE PHOTO | NMG 

Absence of a precautionary IMF cover has exposed the shilling to negative investor sentiment that could cause volatility in the unit, analysts have warned.

Analysts at risk and research firm Stratlink Africa say the shilling also faces headwinds of capital flight from emerging and frontier markets to the US due to rising US interest rates.

This is despite the local currency so far resisting the pressure that has seen peer African currencies depreciate significantly against the dollar. Kenya’s $989.8 million (Sh99.9 billion) Stand-By Arrangement with the IMF expired mid last month, removing the insurance it offered to the shilling in case of a shock to the economy.

“The removal of the standby facility has far -reaching consequences. Increased susceptibility of the currency to volatility has a negative effect on investor sentiment,” says Stratlink in its October 2018 African markets review. “Currency instability risks increasing Kenya’s cost of servicing foreign-currency-denominated debt and with an estimated 32.9 per cent external debt stock as a proportion of GDP in 2017, this cost would be significant.”

This week the shilling was exchanging at an average of 100.90 to the dollar, well within the range of 100.80/101.15 that it has held in the past month following the expiry of the IMF facility.

The relative stability is underpinned by the Central Bank of Kenya’s foreign currency reserves, which the regulator can deploy to mitigate against volatility in the shilling.

The regulator says the reserves are as of now sufficient to cover against such occurrences. CBK data shows the reserves stand at $8.459 billion (or Sh853.5 billion), equivalent to 5.6 months import cover, well above the required 4.5 months. “It is important to note that with current import cover of 5.6 months and a relatively sound macroeconomic environment, Kenya is fairly well positioned to deal with currency shocks,” said Stratlink.

CBK governor Patrick Njoroge has also suggested that the option of a new standby facility remains on the table, saying Kenya will engage IMF but will not sacrifice independence of key decision- making institutions. such as CBK in the process.