Bank dollar rates witnessed a significant decline in the past week, aligning with an uncommon surge in the value of the Kenyan shilling against the US dollar.

Overview of Bank Dollar Rates:

In the latest data gathered from five commercial banks, it was observed that on Friday, these institutions quoted no more than Sh164.50 for clients seeking to exchange their currency for dollars. Notable banks such as Stanbic Bank, Cooperative, Diamond Trust, and Equity all quoted dollars at the same rate, Sh164.50. In contrast, KCB offered a slightly lower rate, selling dollars at Sh163.25.

This stands in stark contrast to the scenario on January 22, 2024, when the Kenyan shilling hit a low of Sh161.35 against the US dollar, as indicated by the Central Bank of Kenya (CBK).

Foreign Exchange Market Dynamics:

Insights from multiple interviews within the foreign exchange market suggest that recent confidence has been bolstered by substantial inflows of hard currency from multilateral lenders and increased foreign investor interest in the newly issued infrastructure bond.

Foreign exchange market participants highlighted the entrance of significant foreign investors into the bond markets, attracted by positive real yields due to high interest rates. Additionally, there is a growing perception that the domestic exchange rate is shifting positively with a notable influx of funds.

Sources indicate a meeting between the CBK and bank executives focused on discussions related to the forex exchange market, although the Kenya Bankers Association (KBA) refrained from commenting. KBA, however, attributed the decline in bank dollar rates to achieving equilibrium between the demand and supply for dollars.

Kenyan Shilling’s Rally Against the US Dollar:

The Kenyan shilling has demonstrated a remarkable rally against the US dollar, as reflected in CBK’s indicative rates. From a low of Sh161.35 on January 22, the shilling strengthened to Sh160.57 by the end of trading on Thursday.

CBK Measures and IMF Assessment:

Over the past year, the CBK implemented various measures to revitalize the foreign exchange market, including reopening in May and eliminating the 20 cents margin for bid prices. However, a January report from the International Monetary Fund (IMF) labeled the interbank foreign exchange market as dormant, dismissing any significant developments from the reforms. The IMF also noted a shift in CBK’s net dollar purchases, reversing its previous trend of selling dollars to banks.

Despite these efforts, skeptics remain cautious about the potential reintroduction of controls by the CBK and the resumption of dollar sales.

Kenya’s Foreign Exchange Regime and Future Outlook:

The IMF characterized Kenya’s foreign exchange rate regime as a crawling peg, indicating coordinated buying and selling of other currencies to maintain the home currency within a predetermined range. As Kenya approaches the record Sh321.1 billion ($2 billion) Eurobond bullet payment at the end of June, CBK-held dollars in official foreign currency reserves are considered crucial.

In December, CBK Governor Dr. Kamau Thugge suggested that the Kenyan shilling had surpassed expected levels, warranting a tighter policy stance to attract foreign flows into domestic markets, including bonds.

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