CURRENCY

Treasury admits to propping up of shilling

This is to avoid further drop against the dollar

In Summary

•The exchequer feared the shilling dropping to 120 units against the dollar

•Kenya used among other measures, funds from IMF and World Bank to support the local currency

The Treasury Building. Senate, National Assembly feud over funds for counties.
TREASURY BUILDING: The Treasury Building. Senate, National Assembly feud over funds for counties.
Image: FILE:

The Kenyan shilling was steady on Thursday, but demand from importers for dollars was keeping it on the defensive, slightly falling to 108.20 compared to 108.15 Wednesday.

The shilling which has been losing grounds against the greenback since March started to stabilize early this week, an aspect National Treasury attribute to management using forex reserves from World Bank.

Speaking during the National Leadership Retreat (NLR) held in Nairobi on Wednesday, Treasury CS Ukur Yatani said they expected the shilling to fall to 120 units against the US dollar but the situation was managed.

"We had expected the shilling to be at 120 by now due to this pandemic but we have to manage the situation with additional forex reserves from IMF, ADP and World Bank,’’ Yatani said.

Mid this month, the shilling hit its lowest levels, posing an economic challenge to the import-dependent nation.

In May, IMF approved the disbursement of $739 million (Sh78 billion) to be drawn under the Rapid Credit Facility to support Kenya’s response to the Covid-19 pandemic.

The same month, the country received $1billion (Sh106 billion) from World Bank to support its budget and cushion the economy from the vagaries of the Covid-19.

The $1 billion financings comprised a $750 million credit from the International Development Association (IDA) and a further $250 million loan from the International Bank for Reconstruction and Development (IBRD).

The loan was priced at 1.35 to two per cent with a five-year grace period. The repayment period is 30 years.

When the dollar strengthens, import costs hike, forcing traders to pass the additional cost to consumers, pushing up inflation.

 

Treasury’s remarks contradict Central Bank of Kenya’s statement that the shilling is not supported but fully valued on fundamentals.

A comprehensive study by the banking sector regulator late last year dubbed ‘Assessment of Exchange Rate Misalignment in Kenya’ shows the average undervaluation of the shilling between 2010 to 2017 outweighed average overvaluation across three methodologies.

"The study finds that the Shilling was in fact, largely undervalued during most of the study period,’’ says the report.

It was countering other reports by IMF and Amana Capital that indicated that the local currency was overvalued by 17.5 per cent and 30 per cent respectively.

IMF accused CBK of managing the shilling by propping it up using forex reserves, concealing the true value against other currencies, especially the US dollar. 

While the Treasury is admitting to propping up the local currency, traders have attributed the sudden strengthening to the relaxed dollar hedging by investors who are slowly returning to business.

This is after ease of global trade restrictions to combat the spread of coronavirus that has since claimed millions.

Diaspora remittances and export earnings from the agricultural sector  are also expected to help the country intensify its forex reserve.