Forex reserves dip as CBK releases dollars to cushion shilling

The shilling still traded at the 110 levels despite the cushioning

In Summary
  • According to the latest CBK weekly bulletin, the reserves fell to $8.883billion from $8.986 billion the previous week.
  • The reserves are equivalent of 5.43 months of import cover and still meets the CBK’s statutory requirement to maintain at least 4 months of import cover.
A cashier at a local Forex count dollars and shillings
A cashier at a local Forex count dollars and shillings

Kenya's forex reserves dropped by over Sh11 billion in the week ended September 3, as the Central bank chipped in more dollars into the market to stave off exchange rate volatility.

According to the latest CBK weekly bulletin, the reserves fell to $8.883billion(Sh977.1billion) from $8.986 billion (Sh988.4 billion) the previous week, a Sh11.3 billion drop.

The reserves are equivalent of 5.43 months of import cover. 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 Central bank said.

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

The releasing of dollars into the market, however, did not calm down the depreciating wave, as the shilling still went above  110 levels, trading at 110.60 against the greenback over the weekend.

The local unit hit a seven-month low against the US dollar last week, partly hurt by depressed inflows from tourism and tea amid a recovering economy that has pushed up demand for imports.

On Thursday, the local currency was exchanged at 110.09 units against the green-back, largely unchanged from 110.03 closing levels on Wednesday.

This is the weakest the shilling has been since February 3 when the shilling traded at 110.11 units to the dollar.

Traders said the shilling continues to be pressured by a widening gap between supply and demand of the US dollars due to faster growth in imports than exports.

The apex bank, however, said the shilling remained stable against major international and regional currencies during the week ending September 2.

A weaker shilling means importers, spend more to bring in goods such as petroleum products and raw materials for factories.

This in turn translates to an increased cost of living as the importers pass on the cost of imports to traders.

The high import bill saw Kenya's cost of living hit an 18 month high in August.

Data from the Kenya National Bureau of Statistics (KNBS) shows the country's inflation rate rose to 6.57 per cent in August from 6.44 per cent in July

The huge increase in the inflation rate was attributable to marginal increases in food and energy costs.

The food and non-alcoholic beverages index during the month rose by 0.46 per cent while that covering housing, water electricity, gas and other fuels has jumped by 0.32 per cent.

The drop in the dollar reserves could also be attributed to external loans interest payments.

In August, the Central Bank was due to pay the latest semi-annual interest installments on the $2 billion(Sh219.8 billion) Eurobond contracted on February 2018 and a nine-year, $1.25 billion (Sh137.4 billion) syndicated loan that was taken up in February 2019.

The Eurobond was issued in two equal tranches of ten years at an interest rate of 7.25 percent and 30 years at a rate of 8.25 per cent.

Kenya, therefore, pays interest worth $155 million annually (Sh17.03 billion) on the bond, in two installments of $77.5 million (Sh8.5 billion) every February and August.

The syndicated loan was taken up at a cost of the six-month Libor (currently at 0.15 percent) plus a 6.95 per cent margin, which translated to about $44.38 million (Sh4.88 billion) in half-yearly interest to the lenders last month.

Libor is the benchmark interest rate at which major global banks lend to one another.

The external debt payments are made by the apex bank from the reserves on behalf of the government.