VOLATILITY

Kenya’s forex reserves dip on rising global oil prices

In Summary

• Volatility in the global economy worsened by surging oil prices will expose the shilling which is highhandedly cushioned by forex reserves in absence of IMF facility

CBK governor Patrick Njoroge
CBK governor Patrick Njoroge
Image: ENOS TECHE

Kenya’s foreign exchange reserves dipped to 5.15 month of import cover in the first week of May,.

This is the lowest in 22 months since August 14, 2017 when it dropped below the five-month index.

The Central Bank of Kenya (CBK), in its latest statistical bulletin released last week, said the amount of foreign exchange currency stood at $8.01 billion (Sh801 billion).

The value of forex reserves in CBK custody for the week ending May 2 were almost Sh9 billion less compared to Sh810 billion or 5.22 months of import cover reported in the last week of April.

Besides importing goods such as petroleum oil, the forex cover is also  used by CBK to buy and sell dollars in the market to cushion the shilling against volatility by balancing demand and supply.

Kenya is currently relying on its forex reserve as the only option to cushion the shilling against external pressures. This is after the country’s standby precautionary facility from the International Monetary Fund (IMF) expired in September last year.

While the CBK did not explain what had caused the decline, market players said that they noted increased demand for the dollar as the global oil prices started to rise late last month after US issued sanctions against Iran’s oil.

Financial Risk Management expert Mihr Thakar told the Star that the shilling is not as safe as last year.

According to him, volatility in the global economy worsened by surging oil prices will expose the shilling which is highhandedly cushioned by forex in absence of the IMF facility.

"Resurgent dollar demand is pushing the US dollar-Kenya Shilling pair up in early session while the foreign currency inflows that previously offered support to the local unit are thinning out leaving the home unit exposed,’’ another expert who requested for anonymity told the Star yesterday.   

He added that monetary regulator had used cash in intervening to inject Kenya shilling liquidity into the market in view of the tightness experienced in the course of last week.

CBK however insists that reserves are adequate, meets the statutory requirement to endeavor to maintain at least 4 months of import cover, and the EAC region’s convergence criteria of 4.5 months of import cover.

On Friday, the shilling lost ground against the greenback to trade at 101.13 as importers rushed to stock on rising global oil prices.

Yesterday, the shilling strengthened against the dollar, helped by inflows from investors buying Treasury bills and bonds. It closed the day at Sh100.70 compared to Sh100.90 on Monday.