Kenya's foreign reserves drop below E.Africa threshold

They are now at 4.4 months of import cover against set target of 4.5 months

In Summary
  • They however met CBK's threshold of 4-months of import cover
  • Dropped by Sh27.1 billion in the week ended July 22
Central bank governor Partick Njoroge speaks to journalists during a press conference at central bank Nairobi on June 20, 2019.
Central bank governor Partick Njoroge speaks to journalists during a press conference at central bank Nairobi on June 20, 2019.

Kenya’s foreign exchange reserves have dropped below East Africa’s set threshold of 4.5 months of import cover, exposing the country to high volatilities in the global market.

The latest weekly bulletin by the Central Bank of Kenya (CBK) shows the country’s reserve dropped by $0.23 billion (Sh27.1 billion) in the week ended July 22 from $7.95 billion (Sh942 billion) reported the previous week.

This, despite the country receiving $235.6 million (Sh27.8 billion) loan as part of IMF's cushion fund approved in April last year.

Although the current reserves are representative of 4.46 months of the country’s import demand and meet CBK’s set threshold of four months of import cover, they are below the prescribed 4.5 months cover recommended by the East Africa Community (EAC) convergence criteria.

The apex bank said the usable foreign exchange reserves remained adequate but failed to give reasons for the drop.

The reserve bank often sells an unspecified amount of dollars from the reserves pool to cushion the local currency by increasing the number of dollars circulating in the inter-bank and money markets. Countries also rely on FX reserves to repay external debts

The reserves are mostly dollar-denominated and act as buffers to potential external shocks for the country. They have sunk more than 12 per cent this year after hitting a high of $8.817 billion at Sh1.055 trillion end of last year.

On Friday, the shilling closed at 118.52 against the US dollar compared to 118.23 units the previous week, illustrating the continued declining mode.

The shilling has dropped five per cent against the greenback that has strengthened in recent days, trading at par with the Euro for the first time since December 1999.

Various international bodies including Moody’s, World Bank and IMF have warned of further weakening of the shilling as the country moves towards the August 9 general election.

In May, Renaissance Capital said the shilling would hit a high of 120 against the dollar this year on both international and local risks.

The shrinking of the country’s FX reserve is likely to pile more pressure on the weakening shilling and constrain importers who have complained of low trade due to low dollar supply.

This forced some businesses to close shop while others rushed to the black market where they bought dollars at a high of 120 per unit, passing over the bill to consumers, pushing up the cost of living.

Last month, inflation rose to 7.9 per cent, breaching the government’s ceiling of 7.5 per cent.

Last week, IMF cautioned the country to prepare for even tougher days, projecting inflation to average 7.3 per cent this year before easing early next year.

A wider current account deficit has also contributed heavily to the fall in forex reserves. It is projected to end the year at an equivalent 5.9 per cent of GDP compared to 5.4 per cent last year.

Besides using the national FX reserve to cushion the shilling from volatilities, the country might have used most of the funds remitted my IMF on Monday to pay interests on the Standard Gauge Railway (SGR) loan that was due close of business today.

Data from the National Treasury shows the country was supposed to pay at least Sh35 billion for the three loans borrowed to construct SGR lines in 2014 and 2015. 

The two loans for the Mombasa-Nairobi phase of the SGR which stood at $1.6 billion (Sh188 billion) and $2 billion (Sh236 billion) respectively were signed in May 2014 and had a grace period of seven and five years respectively.

All these are to be repaid semi-annually in January and July, with the interest rate calculated above the six-month London Interbank Offered Rate (Libor) rate currently at 2.9 per cent.

Libor is the benchmark interest rate at which major global banks lend to one another in the international inter-bank market for short-term loans.

The two loans for the Mombasa-Nairobi phase, the $1.6 billion and $2 billion are to be repaid in 13 and 10 years respectively while that for the Nairobi-Naivasha phase of the SGR has 15-year tenure.