DEPRECIATION

Kenya's forex reserves drops Sh13.9 billion on weakening shilling

Although the drop was the highest in past six months, the regulator said the available reserves are adequate to cover 4.82 months of import cover

In Summary
  • A source at the apex bank told the Star that some an unspecified amount of dollars are sold in the market almost every day to bolster the shilling
  • Yesterday, the shilling traded at a new low of 111.60 against the greenback 
CBK Headquarters
CBK Headquarters
Image: FILE

Kenya’s forex reserves fell by over 12 billion in the week ended Friday December 11 as the Central Bank chipped in support of the shilling that continues to lose ground against major currencies.

According to the CBK weekly bulletin, the reserves fell to $7.84 billion (Sh905.5 billion) from $7.96 billion (Sh919.4 billion) the previous week, a  Sh13.88 billion drop.

This, however, did not calm down the depreciating wave, as the shilling opened the week at a new low, trading 111.60 against the greenback Monday. 

Analysts have attributed the decline of the shilling to high demand for dollars from importers ahead of Christmas, putting pressure on the local unit amid low exports.

Although the drop was the highest in past six months, the regulator said the available reserves are adequate to cover 4.82 months of import cover and meet the statutory requirement to endeavour to maintain at least four months of import cover, and the EAC region’s convergence criteria of 4.5 months of import cover.

A source at the apex bank told the Star that some an unspecified amount of dollars are sold in the market almost every day to bolster the shilling to avert a steep fall to levels that destabilise the financial markets.

During the post-Monetary Policy Committee (MPC) press conference, CBK governor Patrick Njoroge said the lender normally intervenes to cushion the shilling from external pressures. 

Kenya has in the past been blamed of managing the shilling, denting its true value in the market, claims CBK has refuted. 

“Reflecting limited movement of the shilling relative to the US dollar, Monetary and Capital Markets Department (MCMD) 2018 report on exchange rate arrangement will reclassify Kenya’s Shilling from floating to other managed arrangement,” IMF said.

The international lender claimed that the local currency was overvalued by 17.5 per cent. 

The local currency which was in February rated as the most stable in the continent by Renaissance Capital has been losing ground against major currencies as tourism, diaspora remittance and agricultural export receipts drop due to coronavirus effects.

Although other sources of FX reserves like agricultural exports and diaspora reserves have started to rebound after an acute drop between March and July,  the tourism sector which contributed approximately 1.3 per cent to Kenya’s GDP in Q3’2019, is facing hard times due to lockdowns after major economies where tourists originate.

The sector is bringing in near-zero returns.

The local currency, whose volatility is solely managed using forex reserves at CBK in absence of the International Monetary Fund (IMF) cautionary facility that expired in 2018 has shed nine per cent against US dollar, seven per cent against the Starling Pound and almost six per cent against the Euro.

It has also lost considerable ground against regional currencies. On Monday, trading it was bought at 20.75 units against the Tanzanian shilling compared to the pre-Covid 19 rates of above 22.

The Kenyan shilling exchanged at 32.98 against the Uganda shilling compared to Sh34 in March before the local currency started to tumble. 

The continued drop of the shilling continues to hurt importers who are likely to pass the high bill to consumers, pushing up the cost of living in the country as families prepare for Christmas festivities.