September 8, 2011Kenya seeks early IMF funds to ease FX pressure
Nairobi, Kenyan President Mwai Kibaki said on Thursday the government was seeking an early disbursement of funds under an agreed IMF facility to ease pressure on the shilling and help restore order to domestic markets.
The International Monetary Fund confirmed Kenya had sought the additional funds to cope with the impact of a prolonged drought and high prices in the east African country, where inflation stood at 16.67 percent in August.
The shilling has lost more than 15 percent against the dollar this year and the central bank's attempts to stem the weakening last month through liquidity management sent interbank rates sharply higher, prompting the government to weigh in.
"As an immediate step, we are requesting additional disbursement from the IMF under the ongoing extended credit facility to deal with the current challenges," Kibaki said at the listing of a new company on the Nairobi stock exchange.
The Washington-based fund approved in January a $509 million extended credit facility to help Kenya boost its international reserves over a three-year period.
It said the funding request would be considered during a scheduled October review of Kenya's existing credit facility.
"We expect the disbursement to be front loaded to ensure ample supply of foreign exchange to finance required imports without putting pressure on the shilling exchange rate," Kibaki said.
Continues
Kibaki's comments show that months of frustration with central bank's flirtation with unconventional policy that had manifested as a crisis of confidence in markets, had finally been heard at the highest level in the country.
"The government will ensure that there is orderly trading in the money markets for liquidity and foreign exchange. This is critical at this time of turbulence in the international financial markets and demand pressures emanating from internal and external shocks," Kibaki said.
"At the same time our financial regulators must deal firmly with any speculators who may seek to take advantage of the current situation. Such moments call for a degree of patriotism."
The shilling rose to 93.50 against the dollar from 94.10 immediately after Kibaki's comments.
"SHILLING WILL STRENGTHEN"
Earlier in the day, a senior Treasury officials said he expected the shilling to strengthen on the back of increased earnings from tourism and exports.
"It is going to strengthen. If you look today, tourist numbers are going up. Our export earnings are doing pretty good. All our fundamentals are fine," Geoffrey Mwau, economic secretary at the finance ministry told reporters.
Alarmed by soaring interbank rates, Finance Minister Uhuru Kenyatta weighed in on the debate about monetary policy last month, challenging the central bank to restore stability.
Last month's attempts by the central bank to support the currency through short-term liquidity management tools sent interbank rates soaring to just above 28 percent.
The Treasury and the central bank have held several meetings to address the issue and the bank has since changed the formula used to calculate its discount window rate, bringing interbank rates down to just under 9 percent on Wednesday.
"The point is to firm our policy direction to make sure it is consistent with our development objectives. One of them is to stabilise exchange rate and inflation too," Mwau said.
"You have seen what has happened last week. It shows there are still options and the issue is just to co-ordinate that and once you do that it shows things work out well and that is what we have seen in the last one week."
Central bank said it will hold a special meeting of its rate-setting committee on Sept.14, pointing to a likely return to conventional policy-making, after its initial reluctance to tighten policy in the face of higher inflation knocked the shilling.
The bank also sold dollars for the first time in two years on Tuesday this week to shore up the weak currency, sending it higher by more than 1 percent on the day.
Tourists into Kenya hit a record high in the first six months of the year, generating an estimated revenue of 40.5 billion shillings, a 32 percent increase compared to the same period last year.
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