Which way for the shilling as a trillion CBK reserves fail to stem fall

The shilling has continued to dip despite a surge in dollar reserves to a trillion shillings worth of import cover at the Central Bank of Kenya signaling the huge gap in the demand for foreign currency in the market.

The Kenyan shilling hit a record low of 139 units against the greenback on Friday last week, despite an increase in CBK reserves on dollar flows from commercial loans and multilateral flows.

CBK reserves on the other hand increased to Kes1.049 trillion ($7.532 billion), representing 4.15 months’ worth of import coverage up from Kes857 billion ($6.152 billion), or 3.62 import cover the previous week.

Kenya began receiving flows from multilateral lenders after the World Bank approved $1 billion new DPO. The country to access about $400 million in July, from the IMF program which includes the Special Drawing Rights (SDR) of about $2.43 billion. The country will also be receiving external financial flows, having signed a $300 million syndicated loan with the Cairo-based Africa Export-Import Bank.

The market is, however, still skeptical of the huge dollar windfall from multilateral loans and seems to read Kenya will continue having a huge demand for dollars even with extra receipts from multilateral loans coming in to help ease foreign currency supply.

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Foreign currency shortages has build up a pent up demand from exporters, even as the government approaches huge foreign currency loan payments and anticipated build-up of dollar demand to meet the unwinding of the government to government oil credit import deal that ends in September.

This shilling will continue to come under pressure from importers, bilateral and commercial lenders to the government and corporates, shareholders of multinational subsidiaries, wealthy individuals and firms hedging against losing the value of their holdings in a depreciating currency.

Multinationals with Kenya subsidiaries like Safaricom, Absa, Stanchart, Total, EABL, Kakuzi and BAT are set to earn Kes40.1 billion dividends in the interim that will pile pressure on the Kenyan shilling when they seek dollars to repatriate their incomes.

The decline of the shillings and regulatory overreach on the interbank has created arbitrage in the forex market lining banks with billions in profit from trading scarce dollars.

Foreign exchange trading income has become the single largest source of bank’s non-interest income, contributing 39 per cent of bank’s non-funded income, illustrating just how lenders are reaping from the ongoing dollar shortage. 

With a new regulatory direction anticipated with change of guard at CBK, forex incomes is likely to dominate the market in the second half of this year as the shilling unravels to find its market equilibrium.

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