CBK to buy 400 million dollars from banks amid global volatility fears

The Central Bank of Kenya (CBK) has expressed its intent of growing its usable foreign currency reserves above normal levels by buying US dollars from commercial banks.

As such, CBK is set to make purchases of $100 million (Ksh.10.1 billion) on a monthly basis from March to June, amounting to Ksh.40.4 billion ($400 million).

In a letter to all Chief Executive Officers of commercial banks, the reserve bank has asked lenders interested in the transaction to make contact.

“This would bolster CBK’s preparedness to deal with the heightened global volatility and uncertainties,” noted part of the letter, undersigned by CBK Financial Markets Director William Nyagaka.

“Nevertheless, these purchases will be conducted while ensuring that they don’t introduce volatility and instabilities in the foreign exchange market.”

CBK’s stock up on dollars comes as the global economy faces an imminent risk of dislocation from the major slowdown emanating from the outbreak of the Novel Coronavirus with the World Bank estimating the plague could take out up to five percent from 2020’s projected world economic growth.

Nevertheless, the boiling volatility has presented partly gains to the country with the average price of our benchmark oil imports falling towards Ksh.5055 ($50) a barrel from a higher Ksh.6723 ($66.50) to present the potential for significant savings.

The intent to purchase dollars by the reserve bank comes as the country’s reserves take a hit from the recent external debt redemption cycle.

CBK’s usable foreign currency reserves reduced from Ksh.859.4 billion in January to Ksh.850.1 billion in February to represent a narrowed import cover of 5.1 months.

At their highest, reserves stood at a near Ksh.1.4 trillion ($13.4 billion) in May of 2019 an equivalent 6.4 months import cover while at their lowest, the buffer sat a low Ksh.90.7 billion ($897 million) in December of 2000.

The recent weakening of reserves could on the other hand be associated with lesser flows from external commercial debt with the source representing two-thirds of CBK foreign reserves.

Researchers at Genghis Capital have previously warned of Treasury’s dumping of external commercial loans for concessional ones even as the Ksh.200 billion planned commercial external loans remain unutilized in the current fiscal year.

“Concessional financing is unlikely to end up in reserves as raised funds are typically channelled specifically into projects,” said Genghis Capital Senior Research Analyst Churchill Ogutu.

“FX reserves have historically been boosted by debt financing, specifically by Eurobonds and syndicated loans”

According to the IMF, foreign currency buffers allow a country’s monetary authority to meet the balance of payments financing needs, affect currency exchange rates in the currency exchange markets among other related purchases.

The vast majority of world reserves are held in US dollar denominations with the green buck remaining the effective world reserve currency in the aftermath of the end to the 1940’s gold standard.

This is as 61 percent of all foreign bank reserves lie in dollars while nearly 40 percent of the world’s debt is in dollar terms.

China tops ranks in their hold of foreign currency reserves which total to a whopping Ksh.323.5 trillion ($3.2 trillion) ahead of Japan and Switzerland whose holds sit at Ksh.131.4 trillion ($1.3 trillion) and Ksh.85 trillion ($840.3 billion) respectively.

CBK’s approach to accumulating its dollar holdings has come under the scrutiny of financial market observers who were surprise of the straight forward approach by the reserve bank.

According to the financial sector allied stakeholders who spoke to Citizen Digital on the basis of anonymity, the open disclosure of dollar purchases by reserve bank is likely to lead to a run on the dollar with many players hoarding the currency in anticipation for a greater return on future trading.

Nevertheless, the observers expect the sale to be net positive to the economy by injecting fresh liquidity through the higher disbursement of Kenyan shillings.

The mop-up of dollars by the CBK comes as the shilling witnesses new volatility in its trade against the US dollar having closed Tuesday’s trading at Ksh.102.16, the highest close in the year to date.