Kenyan shilling sinks to 2-year low
- The shilling traded at between Ksh.103.74 and Ksh.104.12 on Thursday before settling at Ksh.103.88 according to tracking by Bloomberg, having touched a low Ksh.104.02 at the close of trade on Wednesday.
- The increased offshore payments have spelled doom for the shilling whose value continues to grapple with an expanded flow of money in supply over the last month.
- While a sliding shilling has spooked hysteria from the investor community, the Central Bank has played down risks volatility in expectations of a calm in foreign currency demand on one side.
The Central Bank of Kenya (CBK) has attributed the ongoing slide of the Kenyan shilling to increased foreign payments by the private sector.
The attribution by CBK comes on the back of the shilling trade at a two-year low valuation against the US dollar even as the local unit takes a further hit from increased market liquidity.
The shilling traded at between Ksh.103.74 and Ksh.104.12 on Thursday before settling at a much improved Ksh.103.88 according to tracking by Bloomberg, having touched a low Ksh.104.02 at the close of trade on Wednesday.
Speaking at a post Monetary Policy Committee (MPC) news conference on Thursday, CBK Governor Patrick Njoroge attributed the continued erosion of the shilling’s value to one-off payments in foreign denominated currency, in a factor he says has piled the devaluation pressures.
“Private sector actors have been making external payments beyond the usual monthly settlements. That has led to new demand for foreign currency to relatively out do inflows into the economy,” he said.
The increased offshore payments have spelled doom for the shilling whose value continues to grapple with an expanded flow of money in supply over the last month.
“Further, increasing liquidity has led to some imbalance and has led to actors moving in the Forex exchange market, this we understand,” he added.
The money market remained relatively liquid during the week ending July 18, largely supported by government payments to outdo remittances from tax.
Commercial banks’ excess reserves which make for an indication of market liquidity stood at Ksh.8.96 billion at the close of last week while the average inter-bank rate decreased to two percent from 2.38 percent from the previous week.
While a sliding shilling has spooked hysteria from the investor community, the Central Bank has played down risks of volatility in expectations of a calm in foreign currency demand on one side.
“Some of the imbalances will sort themselves out. Even as the usual end-month demand from importers persists, we would expect inflows to increase,” said Governor Njoroge.
At the same time, CBK has backed its stored firepower represented by a solid external payments account.
The narrowing of the current account deficit to 4.2 percent of GDP in 12 months to June 2019 from a higher 5.4 percent in May of 2018 has propped up the foreign exchange market to retain its relative stability.
Growth in remittances has been the greatest driver to the health of the current account having surged to a record Ksh.30.6 billion to take the cumulative 12-month flow of the diaspora flows to Ksh.287 billion.
The strengthened current account has seen the CBK usable foreign exchange reserves level up at Ksh.1 trillion for the third month running to represent an equivalent 6.2 months import cover.
CBK open market operations provide for the additional shield to volatility including the purchase of government paper and repos from investors to mop up excess liquidity from the money markets.
In addition to the regularly traded t-bills, CBK has been an active participant in the money markets having just completed the auction of a Ksh.40 billion fifteen-year treasury bond.
The bond was 116.7 percent oversubscribed having attracted bids worth Ksh.86.7 billion to signify the elevated liquidity in the market.
CBK accepted offers worth Ksh.50.6 billion at a weighted average rate of 12.3 percent to leave Ksh.36.1 billion in excessive and bids on the table.
The regularly traded Ksh.24 billion worth t-bills were meanwhile 13.5 percent oversubscribed this week having attracted bids worth Ksh.27.2 billion with the short tenured 91 day paper representing the greatest attraction for the bond investors.
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