The Central Bank of Kenya (CBK) has grown its official forex reserves by $837 million (Sh108.1 billion) in the last five weeks after buying dollars from the market, taking advantage of a higher supply of the greenback from remittance and agriculture exports.
CBK Governor Kamau Thugge yesterday confirmed the dollar purchases, saying that the action was also taken to prevent volatility in the exchange rate, as a result of the increased supply of dollars in the market.
By the end of last week, the forex reserves had grown for five consecutive weeks to $8.186 billion (Sh1.06 trillion), equivalent to 4.2 months of import cover, from $7.349 billion (Sh949.4 billion), or 3.8 months of import cover, on August 29.
The CBK adds to its dollar holdings by either buying the foreign currency proceeds of the government’s external loans or through local market purchases.
It rarely discloses details of its activity in the local forex market. Banks that engage in forex trade with the CBK also do not disclose the deals publicly.
The CBK maintained that its policy is to allow the rate to be determined by forces of demand and supply, intervening only when necessary to moderate excessive fluctuation in the exchange rate.
“We have had a significant increase in foreign exchange, both from banks and diaspora remittances. In order to moderate the fluctuations and volatility in the exchange rate, we have indeed been buying forex and that is part of our role and business,” said Dr Thugge in a briefing.
“The same can be said when there is a need to intervene on the other side when the exchange rate starts to weaken. We would also step in to reduce volatility, but we do not seek to affect the overall direction of the exchange rate that would affect the fundamentals of the economy” the CBK boss added.
The dollar purchases have helped the CBK grow its reserves at a time when the government has faced delays in accessing a disbursement of $600 million from the International Monetary Fund (IMF) under the four-year $3.6 billion medium-term programme the fund agreed with Kenya in 2021.
Dr Thugge added that the government remains hopeful that the funds will be disbursed by the end of the year—boosting reserves further—once the parties iron out revisions to the revenue targets that are holding up the latest drawdown.
Removing dollar liquidity from the market has also helped keep the shilling stable in the forex market, where it has traded within a narrow range of Sh129.17 to Sh129.19 to the dollar (as per the official CBK rate) for the past three weeks. The bank has previously said it has no preferred level for the shilling and only intervenes on the forex market to smooth out volatility.
In the year-to-date, the shilling has gained by 21 percent on the dollar, making it one of the top-performing currencies on the continent and reversing last year’s losses of a similar margin that saw it rank as the worst-performing African currency.
The recent shilling stability has been seen at a time when local and global conditions have pointed to potential volatility on the gain side—contributing to the increased supply of dollars in the market.
The decision by the US Federal Reserve to cut its base rate by half a percentage point to a range of 4.75 to 5.0 percent, signalled reduced returns from US financial assets. High US rates usually attract capital from frontier and emerging markets, to the detriment of currencies in these economies.
The Fed decision, which is likely to be followed by a further two cuts before the end of the year points to capital outflows from the US that will improve dollar liquidity in smaller markets, hence the ongoing weakening of the US currency.
