CBK reveals battle with liquidity crisis

August 12, 2008

, NAIROBI, August 12 -The Central Bank of Kenya (CBK) has revealed secret measures it took to battle excess liquidity in the market following Safaricom’s Initial Public Offer (IPO).

Governor Prof Njuguna Ndung\’u says the bank took "bold pre-emptive actions" to cushion the financial sector from the instability that might have arisen from the significant movements of money from the banking system.

CBK\’s top policy-making organ, the Monetary Policy Committee, has subsequently tasked it to track the final movement of the Sh50 billion from the capital market to the state coffers and take corrective measures as soon as the government begins to spend.
The government released 25 percent of its majority stakes from Safaricom—equivalent of 10 billion shares, which it sold at Sh50 billion to raise funds for infrastructure improvements in a transaction which appears to have put the CBK into an overdrive.
Prof Ndung’u says the IPO drove activity within the financial markets to almost abnormal levels-leading to a 30 percent increase in bank lending to the private sector-much higher than the liquidity level that the bank is used to, under normal circumstances.
As the funds head to the government coffers, the CBK is predicting the commercial banks will suffer from lower liquidity demands in the short-run, in terms of lending to the government, before the money begins to make its return to the market.
This is the stage the bank is awaiting for further intervention.
"The bank will continue to carefully monitor the redistribution of liquidity and consequential access to domestic credit as the activities in the money and capital market returns to normalcy," the bank Governor said.
Prof Ndung’u revealed that the local currency strengthened as a result of the announcement by the Treasury that foreign investors were to be allowed to participate in the IPO, leading to the strengthening of the shilling, which it noted, is now weakening normally.
In his comprehensive statement after last week\’s meeting of the Monetary Policy Committee, the CBK Governor said the strengthening of the shilling had been expected as a result of the foreign currency inflows that came in with the IPO.
"These inflows, following the allocation of shares, appear to have left the country either as refunds or through profit-taking. As a result, the exchange rate movements seem to have corrected itself to its long-term market-determined path," the CBK chief said.
CBK hopes shift the war from battling liquidity arising from the series of IPOs that dominated the capital markets to focus its attention on taming inflation, which currently stands at 7.6 percent, against its target of below 5 percent.
Prof Ndungu has termed as \’unacceptable,\’ the continued rise in inflation. The bank has, however, expressed optimism the effect of high inflation was likely to subside as the global price of crude oil eases to US$120 a barrel.

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