March 23, 2011Kenya - Import Cover Reserves Rise to Three-Year High
Foreign currency reserves set aside by Central Bank to cover import bills have shot up to their highest level in three years as the government tapped into an IMF loan borrowed to secure the country's trade position.
Central Bank of Kenya (CBK) said in its latest weekly bulletin that foreign exchange reserves have increased from $3,663 million (equivalent to 3.63 months of imports) as at March 10, 2011 to $3,931 million (equivalent to 3.89 months of imports) on Thursday last week.
"This was due to the conversion of the $283.4 million Special Drawing Rights (SDR) to usable reserves," said the CBK in a statement. This is the highest level in terms of months' worth of import cover since March, 2008.
Currency dealers said the increased reserves, in addition to Tuesday's upward review of the Central Bank Rate (CBR), would help to stabilise the shilling's exchange rate to major international currencies, but warned that effects of the policy changes would take time to be transmitted to the economy.
"This is just but one of the factors that helps to stabilise the shilling by calming the markets," said Peter Mutuku, head of trading at the Bank of Africa. In Tuesday's morning trading the shilling weakened from 84.90 in the morning to 85.35/35 to the dollar, against Friday's closing average of Sh85.30/40.
Dealers attributed the drop to high demand for dollars from the energy sector. "Speculation is still playing in the market because dealers expect the shilling to weaken on increased demand for end of the month dollar obligations," said Andlip Nazir, head of trading at the I&M Bank.
Cynthia Mathenge, a dealer at the Commercial Bank of Africa, said the increased import cover could halt the free fall of the shilling in recent weeks. "The CBK is doing this to prove to the market that indeed it has got enough reserves to support the Shilling," said Ms Mathenge.
The local currency has been on downward slide against both major international currencies and the regional currencies, raising concern among the business community over the cost of imported goods.
It dropped to trade at an all time low to the dollar on Monday last week at Sh86.70, raising panic among market players. The market last week saw high demand for dollars especially from the energy sector as oil importers increased their dollar reserves for fear of future shortage.
Exporters had also added to the problem by holding their returns in dollars fearing the decline of the Shilling.
Currency dealers had said reducing forex reserves was among the key factors that saw the shilling fall amidst high international fuel prices and low foreign exchange inflows.
"Furthermore, in the course of its day to day operations, CBK monitors volatility and where appropriate, acts to smoothen extreme fluctuations in the exchange rate," said the central bank governor, Prof Njuguna Ndung'u.
The reserves have also been supported by the appreciation of major currencies including the US dollar, the Japanese yen, the euro and the sterling pound.
Speculation
The Central Bank said he current levels at which the currency is trading are exaggerated due to speculation and not genuine fundamentals driven demand for dollars. But exporters continue to have better returns though some have complained over high costs of inputs like fertilisers that are usually imported.
CBK officials have been under pressure to stop the free fall of the Kenyan currency but opinion has been divided as to what is driving the exchange rate.
While the CBK has insisted that the slide is temporary and requires no intervention, most dealers reckoned it is a fundamentals-driven move that reflects market sentiments over the currency in view of political uncertainty arising from the impending trials in The Hague of top government officials and politicians.
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