Kenya’s foreign currency reserves breach lower limit

Kenya’s foreign exchange reserves which are held at the Central Bank of Kenya (CBK) have fallen below an equivalent four and a half months of import cover to breach the first lower limit.

New data from CBK shows the official reserves cratered to Ksh.916.2 billion ($7.727 billion) this week from Ksh.943 billion ($7.953 billion) in the previous week.

The current reserves are representative of 4.46 months of the country’s import demand and are below the prescribed 4.5 months cover recommended by the East Africa Community (EAC) convergence criteria.

The reserves which are mostly dollar denominated describe assets held by the CBK in foreign currencies act as buffers to potential external shocks for the country.

The reserves which may also include assets such as gold and special drawing rights (SDRs) have declined by 12.4 per cent in the year so far, coming of highs off Ksh.1.045 trillion ($8.817) at the close of 2021.

The fall in the official reserves has coincided with the weakening of the Kenya Shilling which has shed 4.9 per cent in the year to date against the US dollar.

CBK taps the reserves to meet an array of settlements including external debt service.

At the same time, the reserve bank often sells unspecified amount of dollars from the reserves pool to cushion the Shilling by increasing the amount of dollars circulating in the inter-bank and money markets.

CBK’s official reserves nevertheless remain above the government’s target of maintaining reserves equivalent toat least four months of the country’s import demand.

According to the CBK, the foreign exchange market in Kenya has remained relatively stable in spite of significant volatility at the global stage which has been exacerbated recently by uncertainties’ that have followed the Russia-Ukraine conflict.

“The foreign exchange market in Kenya remained relatively stable supported mainly by improvements in receipts from exports as well as strong diaspora remittances,” CBK said in its latest bi-annual Monetary Policy Committee (MPC) report.

“Nevertheless, the rising import bill with regard to oil and other intermediate goods exerted moderate pressure.”

The rising import bill has served to stretch Kenya’s current account deficit which is now projected to end the year at an equivalent 5.9 per cent of GDP.

A wider current account deficit has in part been attributed to the Shilling’s year to date losses even as the US dollar strengthens against all other major world currencies.

Kenya’s official reserves are however set to be replenished by expected eternal financing disbursements including the recently approved Ksh.28 billion loan from the International Monetary Fund (IMF).

At the same time, Kenya is seeking an estimated Ksh.130.4 billion ($1.1 billion) from a syndicated loan whose disbursement is expected within the opening months of the 2022/23 fiscal year.

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