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The Central Bank of Kenya (CBK) in its weekly statistical bulletin says that reusable foreign exchange reserves are now at 3.94 months of import cover, slipping to a new low from last week?s 3.98.

The value of usable foreign exchange has also contracted from Sh699 billion ($6.6 billion) in July to Sh650 billion ($6.1 billion) last week.

The foreign reserves have been on a downward trend since July this year, but fell below the four-month threshold for the first time in two years last week.

The trend, if it persists, is set to bring back the focus on CBK?s ability to meet its foreign exchange reserves if the current volatility of the currency persists.

The drop goes against the bank?s own policy on import cover.

Section 26 of the CBK Act obligates the bank to ?at all times use its best endeavours to maintain a reserve of external assets at an aggregate amount of not less than the value of four months imports as recorded and averaged for the last three preceding years?.

?There is no magic in the four-month import cover number, but rather convenience, to enable the CBK to fulfil its role as and when required. The foreign exchange market activity of the CBK serves the greater monetary policy goal of managing liquidity in the banking system,? the CBK says on its website.

EXCESS LIQUIDITY

This comes just days after the International Monetary Fund (IMF) allowed Kenya to access an extra Sh8 billion in the Standby Credit Facility, which the Government can turn to ?in the event an exogenous shock?.

This brings the total accessed to Sh64 billion, including what was approved in February 2015.

The Government intends to continue treating both arrangements as precautionary.

?The approval provides additional SDR54.28 million, raising the cumulative amount available under the arrangement to SDR434.24 million (about $610.7 million [Sh64.4 billion]) that Kenya can draw on in the event an exogenous shock leads to actual balance of payments need,? CBK says in the report.

The drop now illustrates the impact of CBK?s increased market intervention to sell dollars in a bid to stop the free fall of the shilling.

The shilling has remained above 105 units against the dollar in the last few weeks in what has seen the CBK intervene in the market, selling dollars and mopping up excess liquidity.

Since the beginning of July, CBK has mopped up Sh284 billion in excess liquidity from the markets, setting the stage for a major liquidity crunch.

UNDER PRESSURE

The regulator has also raised lending rates twice since June, which has seen credit charges go up 300 basis points to 11.50 per cent.

It has also sold an undisclosed amount of dollars in the market at various times to stop the slide of the shilling, as well as set he minimum amount that banks can transact on the inter-bank market at $500,000 (Sh51 million).

The shilling was still under pressure yesterday, weakening in early morning trading as corporates sought dollars, but traders said tight liquidity was keeping the currency from slipping further. Banks quoted the local unit at 105.30/50 yesterday, down from 105.15/25 on Friday.

The CBK participates in the forex market mainly to acquire foreign exchange to service official debt, finance government imports, build its foreign exchange reserves, and, in times of volatility, buy or sell foreign currency to stabilise the market.

Foreign exchange reserves can also be used for liquidity management to inject or withdraw shillings from the market.

By Paul Wafula, The Standard

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