CBK mops up cash as Covid crisis hits shilling

The Central Bank of Kenya (CBK) has maintained its aggressive mop-up of excess liquidity from the market even as the shilling lost ground to the dollar for the seventh straight day on Friday.

Data from the CBK shows that the shilling opened Friday at an average 107.24 units to the dollar in contrast with the previous Friday’s level of 106.20 in the wake of the Covid-19 pandemic, which has hurt export trade and slowed down Diaspora remittances.

This has, in turn, reduced the stock of dollar reserves.

The Friday opening performance meant that the shilling had shed 4.7 percent of its value since March 12 when the first case of Covid-19 was reported in Kenya. It exchanged at 102.42 against the dollar at the time.

Traders have reported aggressive activity by the Central Bank over April through the repurchase agreements (repos) where banks sell Treasury bills and bonds to the CBK with a promise to buy them later.

Several market traders told the Business Daily that the CBK has taken out more than Sh150 billion in excess liquidity from banks since the start of April to ensure the local unit remains stable through what is called open market operations.

Traders reported that the CBK was in the market to mop up Sh20 billion on Friday through the 7-day and 14-day repos.

Tighter liquidity has seen the interbank rate jump up to six percent in April from 3.4 percent in March 10, signalling that banks have less money to lend to each other and constrained money market operations that may affect the shilling. The average interbank rate stood at a relieving 4.95 percent on April 23 compared to 5.93 percent on April 16.

“The interbank liquidity conditions are getting tighter from these mop-ups and could lend some stability to the shilling,” a market source said.

Analysts have blamed the weakening of the local currency on reduced international travel, tourism and exports, which have slowed down dollar inflows at a time when remittances and capital flows have also been hurt by the downturn in source markets.

Dollar inflows from offshore investors and remittances from Kenyans working abroad have both been impacted negatively by the coronavirus.

“The shilling has remained under pressure since mid-March, when the country reported its first case of Covid-19. Foreign investor outflows have increased and CBK has used its forex reserves in a bid to support the shilling,” AIB Capital said in a note.

Official usable foreign exchange reserves had dropped by about Sh60.99 billion to $7.85 billion (Sh839.95 billion) by April 23 or 4.75 months import cover, from $8.42 billion (Sh900.94 billion) on March 13. The CBK has pumped billions to support the shilling, which would explain the dip in dollar reserves. This has rolled back its attempt to stack up dollars from the windfall of lower oil prices after the regulator announced a dollar buying programme in March.

CBK Governor Patrick Njoroge has in the recent past accused “rogue elements” and traders who ‘misunderstood’ CBK’s dollar buying programme of pushing the shilling down. He said they had compounded the problem even as the dollar strengthens globally, wreaking havoc on several currencies as it becomes the safe asset and foreign investors pull out of emerging markets, thus reversing currency flows.

“In early March, we made it clear that we expected a reduction in demand of foreign currency in the market from oil companies. Some dealers misunderstood this that is I guess the fears they had,” Dr Njoroge said in the post-MPC briefing.

“Another point relates to some indiscipline by malicious traders in the market. Unfortunately, we have not been spared of that scourge we have seen it in other markets as well,” Dr Njoroge said.

CBK’s aggressive activity in the market has, however, raised eyebrows among some analysts amid concern that it was creating “confusion” in the market.

“The CBK recently took some actions to unlock billions for onward lending yet it is back in the very market mopping up billions,” a trader pointed out.

Wary of using up dollars, the regulator has now opted to turn to taking money away from banks through the repo market. This contradicts the subsidies measures it unveiled last month to cushion lenders against liquidity challenges during the coronavirus global pandemic.

CBK had increased the duration that lenders are allowed to repo money from 28 days to 90 days in a bid to keep banks flush with cash during the coronavirus crisis. Insiders, however, say no bank has been given this facility by the central bank yet and most of the current facilities are only for seven days.

The regulator also provided Sh35.2 billion extra cash to banks by lowering cash reserve ratios, the part of deposit surrendered to the regulator from 5.25 percent to 4.25 per cent but on strict conditions that it would approve the use of the money to stop banks from lending to the government and patching up their capital.

Insiders say the strict rules have, however, made it difficult to access the cash and as such the CRR remains at 5.25 in practice.

CBK’s Monetary Policy Committee will hold its next meeting on Wednesday to assess the impact of coronavirus. The meeting had initially been scheduled for today.

The committee, which cut the benchmark rate by one percentage point last month, decided to meet after a month instead of the usual two months, citing the need to monitor the economy closely due to the coronavirus crisis.