Kenya's forex reserve falls to a 5-year low as shilling weakens

Efforts by the Central Bank of Kenya to support the weakening shilling on Friday saw the country's forex reserve sink to the lowest level since October 2017.

Data by the apex bank in the weekly bulletin shows reserves dropped a massive Sh28 billion in the week ended September 2 to $7.37 (Sh884 billion) billion from $7.6 billion (Sh912 billion) the previous week. 

''The usable foreign exchange reserves remained adequate at 4.2 months of import cover. This meets the CBK’s statutory requirement to endeavor to maintain at least four months of import cover,'' CBK said.

Even so, the country is in breach of East Africa's FX reserve policy where members are expected to have above 4.5 months of import cover at all times. 

This is the third week Kenya's FX reserves are below the regional benchmark. 

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 interbank and money markets.

Countries also rely on FX reserves to repay external debts. They are mostly dollar-denominated and act as buffers to potential external shocks for the country.

The last time the reserves stood at such a level was in October 2017, underpinning the pressure the Central Bank is facing in a bid to shore up the forex reserves amid the decline of the shilling and increased demand for dollars by importers.

The east African nation's foreign exchange reserves have sustained a downward trend in the past weeks as the apex bank uses part of its stockpile to stabilize the shilling against falling to a level that may disrupt the financial markets.

Kenya’s current account deficit as a percentage of GDP widened to 5.1 per cent in April from 4.8 per cent a year earlier due to higher import costs for fuel, food and industrial goods that outweighed higher inflows from agriculture exports and diaspora remittances.

Apart from low export income, the country's diaspora remittances are now the leading contributor to FX reserves and have dropped in recent months due to high inflation in developed nations. 

The amount of money sent home by Kenyans working abroad dropped for the sixth consecutive month in July.

Data by the CBK shows diaspora remittances to Kenya last month totaled $319.4 million (Sh38 billion) compared to $336.7 million (Sh40 billion) in July last year, a 5.1 per cent drop. 

The inflows reported in July are the lowest since June last year when the country received $306 million.

This was almost Sh1 billion lower compared to $326.1 (Sh38.9 billion) sent in June and Sh2 billion less in May. 

During the week, the shilling declined to exchange at an all-time low of 120.05 against the dollar, down from an average of 119.72 the previous week.

Against the Euro, the shilling closed the week at a low of 120.08 and the Sterling Pound 140.94, said the bank.

The Kenyan currency has declined about six percent against the dollar since the year began amid global crises like the Russia-Ukraine conflict that have disrupted major exports including tea and horticulture, reducing inflows.

Last week, a Financial analyst at FX Pesa Rufas Kamau projected the local currency to drop further to hit 140-145 units against the greenback by end of the year.

According to him, both local and international factors are at play, led by a prolonged election cycle and hikes in the federal rates in the US. 

The US is mulling plans to raid the rate to four per cent. This is likely to further strengthen the dollar to the disadvantage of weaker currencies. The ongoing election petition is not good for the shilling,'' Kamau said.

He added that the drop in the shilling is likely to push up the cost of living and the country's debt obligation. 

Kenya's debt increases by Sh40 billion anytime the shilling drops by a unit against the dollar.

''We should expect more heat on the public debt as the shilling continues to depreciate to at least 140-145 units against the greenback by end of the year,''said Kamau.