Kenya’s foreign currency reserves plunged by Sh28 billion last week as the Central Bank of Kenya (CBK) used its fire power to stabilise the market in the wake of financial markets’ turmoil that followed Britain’s recent vote to leave the European Union.
The CBK’s reserves stood at $7.237 billion (Sh732.45 billion) at the end of last week, equivalent to 4.73 months of import cover, having declined by $280 million from the previous week’s $7.517 billion (Sh760.8 billion) or 4.91 months of import cover, according to weekly official data.
The sharp fall in the amount of reserves held by the CBK also meant that the dollar reserves declined by $431 million (Sh43 billion) in June.
The CBK did not respond to our queries on the dollar expenditure over the one week period, although traders said that the regulator was active in the market selling dollars to forestall Brexit-related exchange rate volatility.
The decline in the reserves represents the biggest one-week fall this year. Although the reserves have been declining for the past eight weeks, the decline had prior to last week been gradual, at a weekly average of Sh2.7 billion.
“They (CBK) were active in the market last week, part of a co-ordinated effort by central banks in reaction to the Brexit, which was likely to cause volatility in financial markets,” said a fixed income trader who spoke on condition of anonymity.
The CBK had said in a statement issued immediately after the UK vote that it stood ready to intervene in the money and foreign exchange markets to ensure their smooth operation, adding that other major central banks had also announced their readiness to intervene to minimise disruption in their markets.
The CBK data shows that the shilling has strengthened to the dollar post-Brexit — from 101.27 units on June 24 to 101.08 yesterday — contrary to expectations that it would weaken on account of the dollar strengthening worldwide against other currencies after the referendum.
The euro and pound, which were expected to weaken against the shilling after Brexit, have done so, with the shilling exchanging at 134.65 units to the pound from 150.21 and 112.67 units to the euro from 114.78 on June 24 respectively.
“The exchange rate displayed mixed performance against major international and EAC currencies during the week ending June 30, 2016 as world financial markets came under pressure after the result of Britain’s vote,” said CBK in its latest weekly bulletin.
Analysts at Ecobank Research raised concerns over the prospects for African currencies in the short term, saying that a number could experience volatility due to a stronger dollar and an unstable pound following Brexit.
“The short- term impact for all markets, including Sub-Saharan Africa, will be mostly negative as currencies struggle to manage volatility,” said Ecobank.
Traders said that although there would be some revaluation effect due to the pound and euro depreciation, this alone would not be sufficient to cause the reserves to fall by Sh28 billion in a week, especially with the dollar rate remaining stable.
The majority of the reserves are held in dollars, which is the main international trading currency for Kenya. Most central banks hold their reserves either in dollars or gold.
Credit: Business Daily