The banking sector regulator purchased dollars' worth more than Sh26 billion ( $305 million ) in six months between April and October last year as it sought to accumulate foreign currency reserves to cushion the shilling from volatility. The Central Bank of Kenya (CBK) has piled up foreign currency holdings to a high of Sh515 billion ( $5.99 billion ), which is equivalent to 4.2 months cover of the country's import bill. Fresh CBK data shows that the regulator was most active in May when on a net basis it bought Sh16.2 billion worth of dollars ( $191 million ), followed by September's Sh10 billion. It supplied the market with dollars only in July when it sold Sh4 billion ( $48 million ). "The stability in the foreign exchange market during the six months to October 2013 prompted commercial banks to sell foreign exchange to the CBK. This contributed to the build-up in official usable foreign exchange reserves," reads parts of bi-annual monetary policy report released last week. CBK ordinarily participates in the open foreign currency market which influences the exchange rate. A purchase of dollars has a net effect of weakening the shilling as it increases demand for the American currency relative to the local unit and vice versa. The regulator has, however, consistently stated that its presence in the market is not interventionist but to smoothen volatility. Adequate foreign exchange reserves act as a buffer against weakening of the shilling as they assure traders that there is enough foreign currency to pay for imports. The minimum statutory requirement for import cover is a cushion of at least four months. The cover is, however, below that agreed on by East African Community members of six months. "Eurobond would go directly to reserves taking it to beyond five month cover which is good ammunition of the CBK," said a senior dealer at KCB, Sheikh Mehran . Export earnings The government is expected to issue a sovereign bond of about $2 billion in the first half of the year. Proceeds of the bond are to clear government debt, with some expected to help shore up forex reserves. The government has already invited JP Morgan Chase to be lead arrangers and Arnold & Porter LLP as lead counsel in the deal giving hope of its fruition after several cancellations in the past. The shilling closed the week trading at Sh85.95 to the dollar with notable demand from the oil and manufacturing sectors. For most parts of Last year, it traded between Sh87.7 and Sh83.7. A drop in earnings from coffee and tea exports due to low global prices had put a damper on export earnings as they have been the country's traditional source of forex income. Diaspora remittances helped stabilise the shilling with monthly inflows averaging $107 million . Increased participation of foreign investors at the Nairobi Securities Exchange and peaceful conclusion of the general election further buoyed the shilling.
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