NAIROBI: Latest Central Bank of Kenya (CBK) data shows foreign-currency reserves at their lowest, underscoring the strain endured by the bank as it intervened intensely to prop up the shilling.
The slide in reserve, which puts the country in precarious financial state adds more pressure on CBK’s newly appointed Governor, Patrick Ngugi Njoroge, who of late has had a rough time rescuing the falling value of the shilling against the dollar.
The latest weekly report by the CBK shows that Kenya’s usable foreign exchange reserves has now dropped to 3.98 months of import cover, down from the 4.2 at the beginning of July.
The actual usable foreign exchange has also contracted by Sh40 billion in the same period, up from the Sh695 billion ($6.6 billion) to Sh656 billion ($6.2billion). The drop goes against the CBK’s own policy on import cover.
Section 26 of the CBK Act obligates the bank to ‘at all times use its best endeavours to maintain a reserve of external assets at an aggregate amount of not less than the value of four months imports as recorded and averaged for the last three preceding years.’
“There is no magic in the four month import cover number but rather convenience to enable the CBK to fulfil its role as and when required.
The foreign exchange market activity of the CBK serves the greater monetary policy goal of managing liquidity in the banking system,” the CBK says on its website. The forex reserve refers to the total amount of foreign exchange held by a government of one country which can be in the form of bank deposits abroad, treasury bonds, short-term & long-term bonds of foreign countries and the claims on non-residents which can be utilised as financing resources should the balance of payments deficits arise.
The drop mirrors the impact of increased market intervention by the CBK to sell dollars in a bid to stop the free fall of the shilling. Last week, the shilling almost hit an all-time low of Sh107 set in October 2011. Yesterday, the bank sought to mop up Sh18 billion in excess liquidity from the money markets. The bank uses term auction deposits and repurchase agreements to take out the liquidity, which makes it costly to hold onto dollars and in turn lends support to the shilling.
The drop now increases the likelihood of the Treasury to turn to the Sh67.5 billion precautionary Stand-by Arrangement and a Stand-by Credit arrangement that the country secured from the IMF for special drawing.
Treasury Cabinet Secretary, Henry Rotich, said the credit facility would be an option to mitigate against shocks that could derail the Jubilee government’s development agenda. Since the beginning of July, CBK has mopped up Sh284 billion in excess liquidity from the markets, setting the stage for a major liquidity crunch.
