Kenya’s foreign currency reserves drop $1bn in seven months

Kenya’s foreign currency reserves have dropped by $1.01 billion in the first seven months of the year, revealing the cost of supporting the shilling and debt repayment.

The reserves have come down to $6.41 billion from $7.425 billion as at end of last December, according to the regulator Central Bank of Kenya (CBK). National reserves had risen above the $7billion last year after sale to CBK by the Treasury of the $2.75 billion raised in the sovereign bond issues.

They now cover about 4.06 months of import cover, just hovering above minimum requirement of a cover equal to four times the monthly import bill.

“The CBK foreign exchange reserves stood at $6.413 billion at the end of July 2015. This level of reserves together with the precautionary facility with the International Monetary Fund provides an adequate buffer against short-term shocks,” said governor Patrick Njoroge in a statement following the monetary policy committee (MPC) meeting on Wednesday.

The MPC did not, however, give a breakdown of how much of the reserves had gone towards support of the shilling and payment of debt.

Kenya’s external debt went up by Sh160 billion to Sh1.33 trillion during the first four months of the year, according to the latest data.

The exchange rate has held above 100 units to the dollar since the first week of July having depreciated by 11 per cent this year, accounting for the local currency revaluation losses of the currency reserve.

CBK has sold dollars to the market several times to control volatility of the exchange rate.

The interventions, however, have been limited since the Central Bank must balance them out against the risk of depleting the reserves, especially at a time when there is heavy demand for dollars to fund, among others, capital goods imports for important infrastructure projects.

READ: Njoroge says shilling's fall now beyond CBK control

The government can alternatively tap into the standby credit facility approved by the IMF earlier this year, or employ other monetary tools to support the currency.

“Having resisted the blunter instrument of a cash reserve ratio hike thus far, the CBK might favour a tactical change.

Regulatory or administrative curbs on trading may also feature in the CBK’s toolkit,” said Standard Chartered head of Africa research Razia Khan in an update last week.

CBK three weeks ago issued a circular curbing the volume of daily foreign exchange trading by banks in a move aimed at limiting speculative trading on the shilling. The circular has effectively limited the value of forex trading to 10 per cent of the lenders’ core capital in a single day.

The MPC, however, sounded optimistic on the possibility of increased foreign direct investment and recovery of key sectors of the economy like agriculture and tourism, which are key in bringing in foreign exchange that could perk up the reserve levels.

Diaspora remittances, another key source of foreign exchange, went up 9.2 per cent to $754 million (Sh76.9 billion) during the first half of this year compared to the same period last year.