Kenya’s central bank has moved to allay fears over the shilling’s dismal performance against the US dollar amid increasing anxiety that rising inflation and weakening currencies in the East African Community (EAC) signal hard times for businesses and consumers.

The Central Bank of Kenya (CBK) said it had foreign exchange reserves of $7.4 billion, enough to sustain 4.85 months of regular imports, which it deemed adequate to cushion the economy against temporary shocks.

This was $1.1 billion, or 4.13 months of imports, above the $6.3 billion at the end of last month. CBK attributed the build-up to sale of sovereign bond proceeds by the government.

“The current level of import cover is the largest that CBK has ever attained,” the central bank said. “It is therefore clear that inflows into the foreign exchange market have continued giving the Central Bank and the economy a cushion to weather any shocks.”

Analysts have blamed the weakening of the shilling to prevailing demand for dollars by importers against low-performing tea and tourism sectors, which has reduced dollar inflows.

READ: EA inflation rises as local currencies weaken against the dollar

In the past two weeks, the shilling has depreciated to a two-and-a-half-year low of Ksh88 to the dollar, having lost 2.5 per cent this year.

Jared Osoro, director of Research and Policy at the Kenya Bankers Association, said the statement reflected CBK’s readiness to make market interventions in the event of volatility in the forex market.

“Arising principally from the sovereign borrowing and not necessarily through either export earnings or portfolio flows, that can only mean that the cushioning of the local currency from the foreign exchange reserves is on the back of weak fundamentals,” Mr Osoro said, adding that the shilling would lose more ground.

Financial market analyst Ally Khan Satchu said CBK was attempting to soothe frayed nerves. He said: “We are seeing the dollar strengthening against the shilling, a scenario that can be compared to the post-2007 election performance in.

“If demand continues this way and we have low inflows, we will breach 89 to the dollar.”

Philip Awandu, a financial analyst, said the market was awash with the local currency due to renewed government spending and maturing bonds and that there was a shortage of forex.

This week has seen CBK buy $38.25 million of excess liquidity from the money market as it sought to mop up the shilling for nine sessions in a row.
“Draining excess liquidity supports the shilling by making it more costly to hold dollars,” Mr Awandu said.

In late August, CBK sold dollars into the market after the shilling hit 88.80/90, then its lowest since December 2011. Early last week, commercial banks quoted the shilling unchanged at 89.05/25 to the dollar, its weakest since it hit 89.10/20 mid December 2011.

Low export earnings

In its September East Africa economic flash note, Dyer & Blair Bank said the Kenya shilling was likely to remain under pressure with tea and coffee earnings at four-year lows. Horticulture exports, among the top three commodity export earners, have also declined.

In 2011, when the shilling hit an all-time low of 107, CBK Governor Njuguna Ndung’u ramped up the key lending rate threefold to 18 per cent to stabilise the battered currency and cap consumer prices.

Bank of Uganda (BoU) has also been in the market for $46 million this month after the Uganda shilling fell to 2,655/2,665, its weakest since February 2013, helping the currency to strengthen to 2,580/2,590.

READ: East African currencies weaken, Ugandan shilling best performer

The Bank of Tanzania (BoT) said on its website that it traded $55.5 million on the interbank forex market over the past week to support the Tanzania shilling, which was trading at 1,680 units to the dollar compared to 1,660 in August.

“The Tanzanian currency continues to weaken against the dollar as importers demand outweighed inflows” the Standard Chartered Bank Daily Market Commentary said.

The Rwandan franc slightly depreciated by 1.9 per cent against the greenback due to high demand for forex to finance imports in the first half of the year. However, inflation has remained below one per cent.

Lawson Naibo, chief operating officer of Bank of Kigali (BK), said depreciation was expected due to dependence on imports.