Shilling steady as CBK drains excess liquidity

By James Anyanzwa

Kenya: Central Bank of Kenya (CBK) has moved to contain the likely resurgence of inflationary pressures and exchange rate instability as the Government increases spending to spur economic activities.

Fears of inflation and a weakening shilling have seen the banking sector regulator mop up Sh15.8 billion in excess liquidity in the market through repurchase agreements and term deposits.

The shilling exchange rate has been seesawing around the Sh86 mark against the dollar with leading banks quoting the currency at 86.60/70 from 86.55/65 on Friday.

Analysts say the National Treasury could partly be responsible for the excess liquidity as it opens its purse to oil the engine of the economy and drive growth.

“I think that Government payments have now started to flow. Government spending is the biggest driver of the economy,” said Polycarp Igathe, chairman, Kenya Association of Manufacturers (KAM).

According to National Treasury Cabinet Secretary Henry Rotich Government payments to suppliers and contractors have been moving on smoothly. “We have been releasing the funds as per the exchequer requests,” Rotich told The Standard.

Analysts at Standard Investment Bank (SIB) said excess liquidity in the economy poses the danger of resurgence in inflationary pressures and a depreciating shilling exchange rate since economic agents take advantage of the increased money supply to increase their imports.

“I think it is not something new, CBK has been mopping up excess liquidity in the market in the last couple of months mainly to control inflation and ensure stability in the shilling exchange rate,” said Francis Mwangi, Head of Research at SIB.

According to the Kenya National Bureau of Statistics the overall inflation rate for the month of March fell marginally to 6.27 per cent from 6.86 per cent in February, partly due to a slight reduction in the cost of electricity on account of lower fuel costs and forex adjustment charges.

The CBK weekly economic report indicates that the money market was relatively liquid in the week ending April 9, 2014 supported by Government payments and net redemption of Government securities.