Foreign reserves shrunk further in the first week of 2019, pushing down the country’s import cover and pilling pressure on the shilling.
A lower import cover in the absence of IMF’s precautionary facility exposes the shilling to volatility and is likely to trigger surge in commodity prices as importers pass the high import bill to consumers.
On Friday, the shilling depreciated to 102.1 from Sh101.8 on New Year eve. Traders told Reuters that the shilling was under pressure due to increased demand for hard currency from goods importers as the pace of business accelerate in the New Year.
Central Bank of Kenya’s weekly bulletin for the week ending January 4 shows the country’s forex cover dropped to $7.9 billion (Sh805 billion) or 5.2 months of import cover compared to $8.03 billion (Sh819 billion) November last year.
The country’s forex reserve has been growing thinner since July last year when it posted an all-time high of Sh1.22 trillion.
However diaspora remittances, the leading forex earner for Kenya, have been growing, rising by Sh13.5 billion to Sh64.7 billion in Q32018.
In October, IMF issued a report, indicating that Kenya was using its reserves to prop up the shilling which it said was overvalued by 17.5 percent, a claim governor Patrick Njoroge denied saying the shilling is properly valued and depends on the forces of demand and supply.
“As has been previously communicated, the CBK’s own calculations support the view that there is no fundamental misalignment reflected in our exchange rate, and reiterates that the Kenya shilling reflects the currency’s true, fundamental value,” said CBK.
Although it did not give reasons to shrinking forex reserve, CBK stated that the country’s forex reserves are well anchored above both national and regional threshold.
“This fulfils the requirement to endeavor to maintain at least four months of imports cover, and the EAC region’s convergence criteria of 4.5 months of imports cover,” CBK’s bulletin read. The banking regulator also blamed shilling’s woes to volatility in global markets, as trade tensions and the partial shutdown in the US continued.