Optimism as shilling holds on to gains after Eurobond reprieve

The Shilling has continued to sustain its rally against the US dollar, three weeks after the successful Eurobond reprieve - boosting newfound optimism among traders and consumers for a lower cost of living.

Data by the banking regulator showed the shilling exchanged at an average of Sh143.5182 against the dollar on Friday, underlining the strengthened local unit in a fortnight.

The development elevates newfound hopes of a medium-term end to a currency crisis involving the steep decline in its value, which had been causing negative ripple effects throughout the economy.

“The Kenya Shilling remained stable against major international and regional currencies during the week ending February 29,” the Central Bank of Kenya (CBK) said in its weekly statistical supplement on Friday.

“It exchanged at Sh143.59 per US dollar on February 29, compared to Sh144.15 per US dollar on February 22.”

The shilling is on a roll at a time when Kenya’s pool of critical foreign exchange reserves fell by over Sh37 billion to $6.962 billion (Sh995.57 billion) on February 29th from $7.21 billion (Sh1.03 trillion) a week earlier, the CBK weekly statistical supplement showed.

The Central Bank says it only intervenes to smooth out volatility when the shilling is moving too fast in either direction.

The CBK normally sells these reserves when it wants to boost the value of the shilling and even out volatility.

It was not immediately clear by press time the impact of the CBK had this week in possibly burning the critical reserves to prop up the shilling.

“The usable foreign exchange reserves remained adequate at $6,962 million (3.7 months of import cover) as of February 29. This meets the CBK’s statutory requirement to endeavour to maintain at least four months of import cover,” said the CBK in the weekly bulletin.

Foreign exchange reserves are largely tapped for government payments such as servicing external debts and essential government imports such as medicines.

The CBK keeps these stashes of US dollars, euros, Japanese yen and other currencies as a financial safety net.

The reserves, the bulk of which are in US dollars, also serve as backup funds in unlikely emergencies such as the devaluation of the shilling, thus giving confidence to investors.

Two weeks ago, Kenya booked billions from global investors to pay off an upcoming Eurobond signalling easing inflation and lowering the cost of imported goods.

The move averted a potential full-blown crisis in June this year – just three months away - when the 10-year Eurobond worth Sh286 billion ($2 billion) at Friday’s exchange rates is due for repayment.

Kenya sold a new $1.5 billion (Sh300 billion) Eurobond maturing in 2031 which it will use to buy back via a tender offer a large chunk of the $2 billion bond due in June

A weak shilling has been keeping the price of imports such as fuel elevated, inevitably pushing up the cost of goods and services and further pushing up inflation. The cost of living measure cooled off to 6.30 per cent last month from 6.90 per cent in January.

The continued strengthening of the local currency is therefore expected to lower the cost of living, further easing pain for households already subjected to high fuel and food prices.