Foreign exchange reserves rise on higher diaspora inflows

Kenya’s foreign exchange reserves, measured as months of import cover, rose in December, providing the shilling with a much-needed cushion in the coming months.

According to the Central Bank of Kenya (CBK), the reserves averaged 4.23 months of import cover, the highest since September when it stood at an average of 4.26 months.

Market players said the rising remittances increased the forex while the absence of CBK action in the market ensured the reserves were not eroded.

CBK’s absence — in terms of releasing its reserves — was clear from the fact that there has been minimal repo activity relative to the maturity of government paper.

The CBK pumps dollars into the market when there is shortage but with the market remaining calm, the monetary authority has had opportunity to accumulate reserves.

When the International Monetary Fund gave Kenya some $110.5 million last November as part of a $760 million aid package, one of the key conditions in the agreement was for the CBK to accumulate reserves whenever it was able to.

The CBK has also been a beneficiary of foreign exchange coming as aid to the government from other donors such as the World Bank, which is financing a number of projects in various sectors ranging from energy to agriculture.

In the past few weeks, the Ministry of Finance has also signed agreements for bilateral financial support with several European countries.

Remittances rose 6.4 per cent to hit $97.5 million in November compared to October.

Analysts said there was also hardly any forex outflow from the stock market, in terms of both equities and bonds. That meant CBK did not have to pump in dollars into the market.

“Remittances have been rising. I think there was no outflow of forex through foreign investors selling off stocks,” said Alexander Muiruri, a trader at African Alliance Investment Bank.

READ: Diaspora cash up 36 per cent as remittance costs decline

Bankers said that CBK reserves had been good for the overall support of the shilling, but the New Year demand had influenced the slight fall to below Sh86 to the dollar.

“Although the CBK had the forex reserves, the market was being driven by demand. Corporate demand had accumulated over the holidays. As the year begins, this demand is finding expression in a depreciated Shilling,” said Peter Mutuku, assistant treasurer and head of trading at Bank of Africa Kenya.

Mr Mutuku said the shilling was likely to remain under pressure in the coming days due to decreasing interest rates.