CBK to buy 100 million dollars per month to boost reserves : The Standard

• Reuters 03rd Mar 2020 14:57:12 GMT +0300

The central bank said it plans to buy $100 million a month between March and June to increase reserves and will also purchase a minimum $1 million from banks at prevailing rates in each deal. The bank has bought dollars in the past through open market operations, but it does not usually disclose the target amount or any other details. New developments across the globe, including a significant drop in oil prices, have opened a window for a more formal dollar purchase programme, the Central Bank of Kenya (CBK) said in a statement seen by Reuters. “This would bolster CBK’s preparedness to deal with heightened global volatility and uncertainties,” it added.

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Traders reacted angrily to the move, saying the central bank’s intervention could distort the foreign exchange market, due to the anticipated spike in demand for dollars. “They should have bought dollars discreetly,” said a market participant who did not wish to be named. The shilling has been one of the most stable frontier currencies this year.

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But on Tuesday it fell to its lowest in three months after the CBK announcement, trading at 102.00 per dollar at 0745 GMT, a level last touched in early December, and down from 101.35 at the start of trading. “They (banks) are pricing higher to sell to the regulator at a higher price... it’s speculation, a one shilling move in a few hours does not make sense,” said a currency trader at a bank.

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Razia Khan, head of research for Africa at Standard Chartered in London, said the announcement by CBK displayed its confidence in the stability of the exchange rate. “It also shows a good deal of forward thinking, anticipating some of the demand on foreign exchange reserves that will occur in the future,” she said. Traders said the move by the CBK could have partly been driven by the government’s growing need for dollars to pay interest on the country’s outstanding dollar bonds. The central bank’s foreign exchange reserves dropped to $8.41 billion last Friday, equivalent to 5.11 months worth of import cover, from $8.51 billion the previous week. The drop reflected an interest payment to the holders of the outstanding sovereign bonds, market participants said, but the central bank said the reserves were adequate, standing well above the required four months of import cover.

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Kenya imported petroleum products worth $3.31 billion last year, at an average price of $66.5 per barrel, the central bank said. That average price has now dropped to $51 per barrel, offering significant savings and opportunity to increase reserves, it added. “These purchases will be conducted while ensuring that they do not introduce volatility and instabilities in the foreign exchange market,” the bank said.

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