- Countries also rely on FX reserves to repay external debts
- It also acts as a buffer to potential external shocks for the country.
Kenya could have potentially breached its forex reserve ceiling of at least four months of import cover were it not for Sh40.6 billion in diaspora remittances.
Data from CBK's weekly bulletin shows the country's forex reserves closed last week at $7.19 billion or 4.03 months of import cover, narrowly inching up against the national set threshold.
''This meets the CBK’s statutory requirement to endeavour to maintain at least four months of import cover,'' the regulator said.
The country's forex reserve has been on a downward trend for the past four months, having breached East Africa's benchmark of 4.5 months of import cover in July.
The country's monetary authority often sells an unspecified amount of dollars from its reserve to cushion the local currency by increasing the number of dollars circulating in the interbank and money markets.
Countries also rely on forex 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.
Experts have cautioned against the dwindling trend, with Jared Wamae of Apex Capital terming it a recipe for inflation.
"Forex reserve, just like oil stock is a strategic resource. It is a sure cushion in the event of volatility in the global market. CBK must religiously guard against its minimum threshold,'' Wamae said.
His sentiments are echoed by capital markets trader Wilfred Simani who says breaching set limits at the time of extreme shifts in the global money market is a great risk to the overall economy.
"Low reserves mean fewer resources for imports, which equals high inflation. I hope the amount stabilises in the coming days,'' he said.
Remittance inflows remained strong at $332.6 million (Sh40.5 billion) in October compared to $318 million (Sh38.1 billion) in September, an increase of 4.6 per cent.
The cumulative inflows for the 12 months to October totaled $3.9 billion (Sh475.8 billion) compared to $3.6 billion (Sh424.8 billion) in October 2021, an increase of 10.9 per cent.
The remittance inflows continue to support the current account and the foreign exchange market. The US remains the largest source of remittances into Kenya, accounting for 57.6 per cent in October.
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.
Yesterday, the Google Currency tracker mapped the shilling at a new high of 122.64 against the greenback before stabilising to close the day at 122.07 units.
The local currency has shed at least eight per cent in value since January, with pundits projecting it to close the year at between 125 and 128.
This has been attributed to a more stable US dollar that has gained 12 per cent in the past year on a high-interest rate regime.
This has forced some businesses to close shop while others rush to the black market where they buy dollars at a high of 130 per unit, passing over the bill to consumers, pushing up the cost of living.
Last month, inflation rose to a seven-year high of 9.6 per cent.