CBK dollar reserves fall below 5-month cover as shilling treads on 109 mark
The Central Bank of Kenya (CBK) usable foreign currency reserves have fallen below the five months import cover in the past week as the shilling faces pressure.
The dollar denominated reserves fell to Ksh.894 billion ($8.223 billion) in the past week to Thursday or an equivalent 4.99 months of import cover from a higher stock of Ksh.959 billion in mid September which represented an equivalent 5.36 months import cover.
The falling reserves have coincided with the depreciation of the local unit which has already breached the Ksh.109 mark for the first time in its exchange against the US dollar once, last Tuesday.
According to the Kenyan shilling spot tracked by Bloomberg, the local unit touched a record low 109.16 at the weekend.
CBK’s last quote on the shilling which represents an average of the units rate of exchange at local commercial banks was at a similar record low figure of Ksh.108.77.
The falling dollar reserves are in part attributable to CBK’s open market operations (OMOs) which sees it sell dollars in the market to smoothen out volatility in the local unit.
The size of the reserves however remains clear of the 4.5 months import cover desired under the East Africa Community (EAC) region’s convergence criteria.
The depreciation in the local unit has remained a puzzle in spite of being previously linked to unmatched dollar demand in the interbank market.
According to a market participant who spoke to Citizen Digital on condition of anonymity, the local unit is battling a low confidence as investors price in a volatile economic environment which includes a looming second round of COVID-19 restrictions and a worsening fiscal policy stance.
Additionally, the source indicates a significant growth in money in circulation triggers by continued CBK cash injections which loosely translate to the government printing cash to meet its share of payments.
The observation is closely backed by data from the CBK Monetary and Finance Statistics which have shown an expansionary M3 base.
According to the data, broad money in supply (M3) has expanded through out the year but for a slight downtick across the month of August.
The amount of money in circulation presently stands at Ksh.3.847 trillion in comparison to Ksh.3.465 trillion at the same time last year indicating a Ksh.382 billion increase.