IMF gives Kenya Sh67.5 billion loan to tame shilling's free fall

By Paul Wafula
Monday, June 15, 2015

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The volatile shilling has got a major boost after Treasury said that it had secured Sh67.5 billion precautionary loan from the International Monetary Fund ( IMF) to cushion it against shocks.

National Treasury Cabinet Secretary Henry Rotich said the Government had secured a precautionary Stand-by Arrangement and a Stand-by Credit arrangement with the IMF for Special drawing rights (SDR) of 488.52 million or $688.3 million.

Rotich said the credit facility which translates to about Sh67.5 billion at current exchange rate is necessary to mitigate against shocks that could derail the Jubilee government’s development agenda. “We intend to draw on the facility only in the event of an exogenous domestic or external shock,” Rotich said in the Budget statement delivered to parliament on Thursday.

Monetary policy

Rotich said the Shilling exchange rate has been under pressure against the US dollar, largely due to the strengthening dollar in the global currency market as a result of strengthened US economy and the anticipation of a tightening of monetary policy by the US Federal Reserve Bank.

To avoid further pressures, which in part reflect, speculative behaviour, the Central Bank of Kenya (CBK) has tightened monetary policy by raising the Central Bank Rate to 10 per cent from 8.5 per cent.

The Government is hoping the tightening of liquidity combined with the significant level of foreign exchange reserves at CBK which are over of $7 billion (Sh686 billion) would bring the volatility to a stop. The IMF delegation was in the country a fortnight ago to assess how Kenya has been using its standby credit facility. The effects of slide of the shilling is expected to start being felt this month as importers pass on the exchange losses to consumers. Already loans are set to become a lot costlier after the CBK started tightening liquidity. Speculation has been blamed as the major cause of the slide of the local currency.

CBK has also been hard-pressed to explain whether the latest weakening could be linked to the shut down of 13 Somali remittance firms. CBK Deputy Governor Haron Sirima, however, said the bank of last resort had not seen any evidence that there was a decline in foreign remittances.

Dr Sirma who attributed the slide of the currency to speculation also said there was no evidence commercial banks were involved in manipulating the shilling as was the case in November 2011 when the currency was at comparable strain.

The shilling slide to a new three-and-a-half-year low of 98.15/98.25 to the American dollar on last month. Last Friday, it was hovering at between 97.10/97.30 to the dollar.

Interbank market

But it has been recovering some of its losses after the CBK continued to be involved in direct market operations, selling undisclosed amount of dollars to the interbank market. It has also benefited from positive sentiments after the Government named CBK governor designate.

In the aftermath of the Garissa University terror attack last month where 148 people were killed, the State suspended licenses of the remittance firms on grounds the services were being used to fund terror attacks. This freeze cut transfer of money into the country on the platforms.

Those affected include popular Dahabshiil and smaller ‘Hawala’ players like Kendy, UAE Exchange, Amal, Iftin, Kaah Express and Amana. Others are Juba Express, Tawakal, Bakaal, Hodan, Continental and Flex.

It is estimated that Somalis in the diaspora use these money transfer services to send about Sh120 billion ($1.3 billion) back home to support their families. But it is not yet clear how much of this is sent to Kenya.

Kenya’s export growth has been sluggish while the tourism sector, its traditional source of foreign exchange earnings, has been reflecting negative growth rate. The 2015 Economic Survey shows that Kenya’s current account deficit stands at 10 per cent of GDP, financed mainly through capital and financial inflows.

Exchange rate

The Government has argued that Kenya is not the only country whose currency was coming under pressure. In the period, the shilling exchange rate against the dollar has depreciated by five per cent.

Other currencies experiencing volatility are the Nigerian Naira (nine per cent), Uganda shilling (nine per cent), Tanzania Shilling ( four per cent), Ghanaian Cedi (20 per cent) and even the Euro (11 per cent).

To stem volatility, Sirma says the CBK has adopted a tight monetary policy operations stance to minimize any likelihood of arbitrage activities between the interbank and foreign exchange markets.

Sirma added that the CBK is also counting on the foreign exchange reserves and a precautionary facility from the IMF to stem volatility.

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