Dollar scarcity looms as Kenya's forex stock hits decade low

Latest data from the Central Bank of Kenya shows the available FX reserves stood at $6.605 billion (Sh840.1 billion) on Friday, having shed Sh13.1 billion compared to the previous week.

They continued to breach the critical threshold level of four months’ import cover in the wake of the high demand for dollars by importers and maturing foreign debt repayments.

According to CBK, the available reserves are equivalent to 3.69 months’ import cover, which is the lowest since January 2013. 

Kenya’s reserves have dropped in the past 14 months, partly due to repayments to bilateral and commercial lenders and the CBK’s intervention to try and slow down the shilling’s depreciation against the greenback.

The shilling has remained on a steady decline against the dollar, exchanging at a historic low of Sh128 Friday morning before stabilizing to 127.72.

The local currency has shed almost 12 per cent against the US dollar and is expected to plunge more as the U.S. Federal Reserve meeting minutes show policymakers are determined to use a slower pace of interest rate hikes to tame persistently high inflation.

Besides stabilising its weakening shilling due to market forces, FX reserves are dropping in a period when the country is expected to repay foreign debts close to Sh70 billion by April 15. 

The reserves are used by countries to meet their international financial obligations such as paying foreign debts, influencing monetary policy and supporting the importation of critical goods.

The size of the official reserves usually projects an air of confidence and calms investors’ fears in the event they want to move their money out of a country.

Speaking to the Star, money markets analyst Ken Babu wants CBK to wake up and smell the coffee as things are getting grimmer. 

"It is not enough for CBK to deny the ongoing dollar scarcity that has persisted for the past eight months or so. Banks are now selling the greenback at Sh138, ten units above CBK's rate,'' Babu said. 

Traders are now in the black market. This is not sustainable. I fear that inflation will burst the 10 per cent in the coming months as businesses pass the high import bill to consumers. 

"Kenya is a net import economy. While our agricultural exports are likely to benefit from the bullish dollar, gains are lower than losses. It is time for CBK to do away with its dovishness as other markets have activated their hawk jaws,'' Babu said.

Kenya has over the years relied on external financing to replenish its reserves but now faces the prospect of having to make debt repayments without sufficient inflows, according to another analyst.

The government is betting on debt inflows to shore up the reserves, with concessional funding from the World Bank and the International Monetary Fund (IMF) expected to boost the forex cover.

Previous disbursements from the multi-lateral lenders have had the effect of lifting the reserves to new highs.

President William Ruto's government is waiting for $750 million (Sh95.4 billion) disbursement from the World Bank by June.

This will be Kenya’s fifth loan under the World Bank’s Development Policy Operation (DPO) framework, which has seen the country access $3.25 billion (Sh399 billion at the present exchange rate) from the Bretton Woods institution.

The loan will be part of the Sh280.7 billion ($2.3 billion) earmarked for external borrowing in the current financial year. It is also expecting continued flows from IMF’s 38-month Sh293.1 billion ($2.34 billion) programme.

The country is further betting on re-entry to the international capital markets to rebuild the cover through the issuing of either a Eurobond or a syndicated loan.

Last month, President William Ruto gave the clearest hint that Kenya could go for a syndicated loan to meet budgetary demands for the year ending June 30.

Addressing governors in Naivasha, Ruto who has been critical of local debt attracting interest rates of more than 10 per cent said the international market has finally opened its doors for Kenya. 

''The European debt market has now reinstated confidence in us. We can now access syndicated loans that we have been looking for to fund development projects at seven to eight per cent,'' said the President.

His sentiments came months after the National Treasury Cabinet Secretary Njuguna Ndung’u informed IMF of the country's intention to borrow $900 million in the current financial year.

While Kenya targets keeping reserves at a minimum of four months of estimated imports, the central bank has previously maintained that its fall should not cause alarm, terming the breach of the limit a ‘non-event’.