IMF billions to shore up forex reserves

June 30, 2011 9:08 am

, NAIROBI, Kenya Jun 30 – The International Monetary Fund has advanced $65 million (Sh5.8 billion) to Kenya under the Extended Credit Facility to boost the Central Bank\’s foreign exchange reserves.

The fund is a welcome relief to the CBK whose reserves are estimated to be at $3.904 billion.

The boost is also timely, as recent weeks have seen volatility in the forex market with the shilling touching a 17-year low at Sh91.90 against the greenback.

"The completion of the review enables the disbursement of SDR 43.424 million ($65 million), which will bring total disbursements under the arrangement to SDR 108.56 million (about $163 million)," the IMF said.

The latest batch is part of the $509 million loan agreed on at the end of 2010 between the IMF and the CBK.

In approving the release of the funds, the IMF highlighted that the outlook for private investment remains positive, with new foreign investors reinforcing the upward trend in capital expenditure by firms already operating in the country.

The IMF was however worried of recent inflationary pressures that posed a threat to high economic growth.

"However, recent inflationary pressures have emerged as a result of the global increase in food and fuel prices, insufficient rains, and growing domestic demand," the IMF said.

The Bretton Woods institution however applauds the Central Bank\’s efforts in tightening monetary policy to curb inflationary pressures as well as stem the shilling volatility.

On Wednesday, the CBK raised its overnight lending rate to the banks to eight percent as it attempts to rein in on inflationary expectations and curb speculative trade in the shilling.

The move is one of the instruments that CBK is using to try to reduce the amount of money in supply by making it expensive for banks to borrow money from it for onward lending.

The bank also blocked the use of funds borrowed from the overnight window to trade in the foreign- exchange market.

"The focus of monetary policy should thus be on controlling demand pressures in order to preserve macroeconomic stability and to ensure that the recent burst of inflation does not become entrenched," the IMF said.

Dealers at Commercial Bank of Africa\’s Treasury Department said the market was still analysing the CBKs policy to raise the overnight borrowing window to eight percent.

"The move makes the shilling more attractive and is expected to lead to bullish trade in the short term," they said.

The shilling edged against the dollar in Thursday\’s session to trade at Sh89.45/89.65.

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