Weak shilling hands CBK Sh131bn unrealised forex gain

The Central Bank of Kenya (CBK) doubled the unrealised exchange gains on its dollar reserves to Sh131.5 billion in the year to June 2023 from Sh68.6 billion a year earlier on the back of a significant weakening of the shilling against the US currency in the period.

The jump in the value of forex holdings at the monetary regulator helped raise its net surplus for the year to Sh150.5 billion from Sh76.9 billion in the year to June 2022, according to disclosures in the regulator’s latest annual report.

The CBK is the custodian of the country’s official foreign reserves, which by the end of June stood at $7.48 billion (Sh1.115 trillion at present exchange rate).

These reserves are a national asset held as a safeguard to ensure the availability of foreign exchange to meet the country’s hard currency obligations, including imports and external debt service.

The value was boosted by the weakening of the shilling against the dollar by 19 percent in the 12 months to June to exchange at 140.52 units, pointing to the advantage that dollar holders have enjoyed even as spenders such as importers continue to suffer losses arising out of higher forex purchase costs.

The CBK’s actual or realised gains in the year (net earnings) rose to Sh19 billion from Sh8.33 billion in 2022, due to higher returns from its securities and deposits.

“During the financial year ended 30 June 2023, the Bank’s operating surplus was Sh19 billion (2022: Sh8.33 billion) due to higher average returns on the securities portfolio and deposits.

An unrealised foreign exchange gain of Sh131.49 billion was recorded during the year (2022: Sh68.56 billion) due to the strengthening of the US dollar against the shilling,” said the CBK in the annual report.

Read: Weak shilling, debt sink KQ into Sh21bn half-year loss

“The Bank also recorded a fair value loss on fixed income securities held at fair value through other comprehensive income (FVOCI) of Sh4.69 billion (2022: loss of Sh21.61 billion) as a result of a decline in market prices.”

The doubling of the realised gains to Sh19 billion saw the CBK increase its dividend to the Consolidated Fund by Sh1 billion to Sh5 billion in the period.

Both the realised and unrealised gains added to the CBK’s general reserve fund, which by the end of the period had an accumulated realised surplus of Sh65.5 billion (2022: Sh54.47 billion) arising from normal operations of the bank, and unrealised gains of Sh301.24 billion (2022: Sh172.5 billion).

In the year to June 2022, the CBK had used part of the realised gains to boost its paid-up capital to Sh38 billion from Sh35 billion in 2021.

Similar to the CBK, the private sector has also been eyeing the capital gains on offer from holding onto dollars in recent months, pushing their holdings of the greenback in local bank accounts to a record Sh1.25 trillion equivalent by the end of July.

These deposits had risen from Sh904.2 billion a year earlier, which largely reflects the exchange gains made on the holdings, even as the actual dollars continued to accumulate in line with the growing economy.

Depositors have also been holding on to their dollars more tightly due to lingering concerns about accessing forex in the market, although the situation has improved compared to the beginning of the year when a non-functioning interbank dollar market squeezed the supply of dollars to the economy.

Read: Weak shilling, global rate rises cost Kenya Sh27bn

Corporates account for about 70 percent of Kenya’s dollar deposits, with the rest in the hands of households, indicating that the bulk is not held for speculative purposes.

For commercial banks, however, where these dollar deposits sit as a liability, there has been concern that the sharp gain in value is putting pressure on their capital buffers, as they have more forex liabilities than forex assets.

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