MONEY MARKET

Kenya's forex reserves dip further to bear minimum

Internationally, a country is supposed to keep its forex reserve at least three- months of import cover.

In Summary
  • The drop is likely to be a result of  propping  up the shilling which has lost almost eight percent
  • A further fall in forex reserves is expected as six months debt suspension plan by G20 countries and Paris Club expires in June,
CBK Headquarters
CBK Headquarters
Image: FILE

Kenya's foreign exchange reserves have  reserve shrank to almost minimal statutory levels., latest figures show. 

According to the Central Bank of Kenya weekly statistical bulletin, the  reserves are down to $7.351 billion or 4.52 months of import cover, less than the East Africa Community’s convergence criteria of 4.5 months of import cover. 

The country's reserves which hit a high of $9.42 billion or 5.8 months of import cover in July last year have been on a downwards trend, dropping a massive Sh27 billion to $7.359 billion (Sh807.28 billion) on  March 4, down from $7.605 billion (Sh834.27 billion) as at February 25.

Although the reserves are slightly above CBK's statutory requirement of at least 4 months of import cover, it is just slightly  above EAC's threshold, indicating impending danger in case of unexpected volatility. 

Countries use foreign currency reserves to keep a fixed rate value, maintain competitively priced exports, remain liquid in case of a crisis, and provide confidence for investors.

They also need reserves to pay external debts, afford the capital to fund sectors of the economy, and profit from diversified portfolios.  

Although CBK did not give reasons for the drop in forex reserves, it is highly possible that it used much of it to prop up the shilling which has lost almost eight per cent against the dollar on coronavirus economic shocks. 

The huge drop in forex reserves witnessed early this month is suspected to have been a result of interest payments on the country's second Eurobond, which was contracted on February 22, 2018. 

The $2 billion loans were issued in two equal tranches of 10 years at a coupon of 7.25 per cent and 30 years at a coupon of 8.25 per cent.

Kenya was to pay an interest of $77.5 million (Sh8.5 billion) on February 22 and a similar amount in August. 

The government is also servicing a nine-year $1.25 billion syndicated loan that was taken up in February 2019 for refinancing purposes, with its interest also paid semi-annually.

The loan was taken up at a cost of the six-month Libor (currently at 0.2 percent) plus a 6.95 per cent margin, which means that the Treasury was effectively expected to pay around $44.7 million (Sh4.9 billion) in half-yearly interest to the lenders last months.

A further fall in forex reserves is expected as six months debt suspension plan by G20 countries and Paris Club expires in June, forcing Kenya to repay all external debts due. 

An economist Sam Achar told the Star that Kenya is likely to draw much from its reserves to pay dollar-denominated loans.

"Domestic revenue is shrinking, mostly used to clear recurrent budget. It is either Kenya returns to the international debt market to pay off loans due or draw from forex reserves,'' Achar said.

He added that the country's currency will be in a volatile state should the government chose the latter method to clear the debt. 

There is a danger in depleting forex reserves. The shilling will be weakened, forcing traders to import at a higher cost. The end result is the high cost of living,'' Achar said. 

Internationally, a country is supposed to keep its forex reserve at least three- months of import cover. 

Last month, Standard and Poors (S&P) ranked Kenya among countries that are short of having enough reserves to cover debt coming due in the next 12 months.

''By traditional rules of thumb, reserves should cover the equivalent of three months of imports. By this measure, a host of emerging markets are in trouble or close to it,'' S&P said in its report.