Kenya's dollar reserve shrinks by Sh30 billion on loan repayment

Kenya's forex reserves dropped by almost Sh30 billion in a week that ended July 23 as the country executed its first charge of the 2021/22 budget.

According to a weekly bulletin by the Central Bank of Kenya, the usable foreign exchange reserves remained adequate at $9.37 billion (Sh1.01 trillion) or 5.73 months of import cover from $9.62 billion (1.04 trillion) the previous week. 

''This meets the CBK’s 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,'' the banking regulator said. 

It, however, failed to explain the reasons for the huge drop.

July is the first month of the government year. It is highly likely that the National Treasury used a sizable amount of the FX kitty to settle the first charge of 221/22 budget year. These include payment of the debt due and pension.

The country must have used part of the dollar reserves to settle Sh96.7 billion debt to China including the first installment for the Nairobi-Naivasha phase of the Standard Gauge Railway (SGR).

This follows the end of the six-month debt repayment holiday that Kenya received under the auspices of G-20, a group of wealthy countries.

The country was supposed to start repaying the Sh162 billion used to build the Nairobi-Naivasha SGR line in January but got a six-month breathing time. 

According to the National Treasury, $1.482 billion (Sh162 billion) debt from the Exim Bank of China that Kenya tapped in December 2015 had fallen due after a five-year grace period with the country expected to make 30 semi-annual payments for the next 14 years.

Kenya has been pushing for the extension of the debt repayment holiday to June 2022. 

The surge of commercial debts piled since 2013 has become expensive to sustain with repayments and interest taking up more than 65 percent of tax revenue in the next financial year.

Last month, Kenya went into the Eurobond market to raise funds to clear due loans. 

It raised Sh108 billion ($1 billion) in a Eurobond issuance, at an interest rate of 6.3 percent for the 12 years.

The public debt management office has been working to reduce borrowing rates and lengthen or stagger repayment periods to ease pressure on the country’s cash flow.

Generally, the country's debt profile grew by Sh400 billion since March despite mounting pressure on the National Treasury to cut loan appetite. 

The latest Weekly bulletin by the Central Bank shows that the country's total debt is now at Sh7.713 trillion up from Sh7.3 trillion. 

''Kenya’s publicly guaranteed debt stood at Sh7.713 trillion by the end of June 2021. This comprised Sh3.697.7 trillion domestic debt (47.9 percent) and Sh4.015.3 trillion external debt (52.1 percent),'' CBK said.

The country has in recent months accumulated a number of loan facilities including the fourth Eurobond issue of $1 billion (Sh108 billion) in June. 

Apart from external loans, Kenya has accumulated huge domestic debt, with most of it hitting maturity. 

The high debt obligation must have eaten into the country's FX reserve which has been for the past year supported by high diaspora remittances after Covis-19 hurt tourism receipts and agricultural exports. 

Last Month, Kenyans working and living abroad sent home $305.9 million (Sh33.1 billion, with the US remaining the largest source of the inflows into the country.

This was about six per cent more when compared to the $288.5 million (Sh31.2 billion) sent home in a corresponding month last year.

The cumulative inflows in the 12 months to June 2021 totaled $3.38 billion (Sh365.6 billion), a 20.3 per cent jump compared to $2.81 billion (Sh303.9) billion same period in 2020.

The drop in the forex is likely to hurt the shilling that has in the past weeks stabilized against major currencies. 

On Friday, the shilling exchanged at Sh108.20 per US dollar on July 22, a slight drop compared to Sh108.03  on July 1.