Central Bank posts Sh4.6bn deficit on stronger shilling

The Central Bank of Kenya (CBK) posted a deficit of Sh4.6 billion in the year ended June when the strengthening of the shilling saw the institution book large unrealised losses on its dollar holdings.

The bank had reported a surplus of Sh17.5 billion the year before.

CBK’s foreign exchange losses in the review period stood at Sh18.6 billion, overshadowing higher interest income and reduced interest and operating expenses.

The shilling traded at 101.05 units to the dollar at the end of June 2018 compared to 103.71 units at the end of June 2017, representing an appreciation of 2.63 percent against the greenback.

“The strengthening of the Kenya Shilling against the US dollar over the fiscal year 2017/18 was largely supported by strong foreign exchange inflows into the domestic market as well as investors seeking to participate in the securities market,” CBK said in its annual report.

The bank added that the dollar weakened steadily through late 2017 and into early 2018 amid uncertainties with regard to US economic policies and “a growing appreciation among investors for the improving fundamental prospects outside of the US.”

Before factoring in relative currency movements, the bank had an operating surplus of Sh16.1 billion in the review period compared to Sh9.9 billion a year earlier.

CBK’s total interest income surged 39.1 percent to Sh20 billion, buoyed by higher reserves and rising interest rates on dollar-denominated fixed income assets.

“Interest income rose due to the higher interest rates on US dollar denominated reserve instruments plus higher reserve levels,” CBK said.

The bank’s official reserves rose steadily to $8.9 billion in June 2018 compared $8.5 billion in June 2017.

Average yields on one-year US treasuries, meanwhile, rose from below one per cent in early 2017 to the current rate of 2.63 per cent as the Federal Reserve continued with its quantitative tightening policy.

CBK’s lending to the government and banks earned it interest income of Sh3.2 billion and Sh3 billion respectively.

Its interest expenses dropped 48.7 percent to Sh881 million, partly due to the benchmark Central Bank Rate (CBR) dropping from 10 percent in 2017 to 9.5 percent in June 2018.