Kenya’s import cover has dropped to the lowest levels in seven years, reflecting lower foreign funding amid a faster growth in imports than exports and a slowdown in remittances from Kenyans abroad.
Latest Central Bank of Kenya data shows the stockpile of foreign currencies stood at $7.32 billion (Sh752.96 billion) last Thursday, a drop of $103 million (Sh12.45 billion) compared with the week before.
At that level, the large dollar reserves can cover the country’s import needs for 4.13 months, the lowest cushion since 4.10 months on October 22, 2015.
Foreign exchange reserves are largely tapped for government payments such as servicing external debts and essential government imports such as medicines.
The reserves, the bulk of which are in US dollars, also serve as backup funds in unlikely emergencies such as devaluation of the shilling, thus giving confidence to investors.
The CBK was last week reported having sold an unspecified amount of dollars to iron out volatility in the trade of the shilling which averaged 120.85 units against the US currency on Friday — a depreciation of 6.81 percent since the beginning of the year.
Kenya’s import cover is slightly above the statutory four months of import but has since July fallen below the desired 4.5 months cushion recommended by the seven-nation East African Community bloc.
“We have adequate reserves, but the [foreign exchange] markets need to improve in the way they are functioning. There was noise in the market as we came towards the electioneering period. That led to weaker performance of the market,” CBK Governor Patrick Njoroge told a press conference on September 30. “Now that all that has been resolved, we expect… continue to strengthen the market.”
Kenya abandoned plans to borrow at least $1 billion (Sh120 billion) from international capital markets — Eurobond — in the fiscal year ended June, hurting dollar inflows. That was after interest demanded by international investors doubled to about 12 percent from 6.3 percent Kenya paid a year earlier for a similar amount.
The inflows have further been hit by a faster growth in imports than exports, while diaspora remittances have slowed in recent months.
For example, expenditure on imports bumped 25.96 percent year-on-year to nearly Sh1.25 trillion in the half-year period through June, a higher growth than 17.31 percent in earnings from exports to Sh434.02 billion.
Remittances from Kenyans abroad, on the other hand, grew at a slower pace of 11. 44 percent to $2.67 billion (Sh322.49 billion) in the first eight months of the year compared with a growth of 19.21 percent a year earlier to $2.4 billion (Sh289.40 billion).
“It is true if you look at the last couple of months, the numbers have been soft. There are two things that are driving that. First is a very strong seasonality and we have seen it before. We expect the next quarter… [from October] there will be a reverse of that, and there will be an increase towards Christmas,” Dr Njoroge said. “The other thing is that the diaspora, the remitters, are having their own cost of living shock. So one would expect they have to adjust their budgets to accommodate some of the remittances.”
The forex markets were earlier in the year gripped by a mismatch between dollar demand and supply, with importers at the time saying they were paying higher than official exchange rates published by the CBK.
Deputy President Rigathi Gachagua said on October 2 that large importers such as oil marketers were still struggling to access adequate dollars to pay for essential commodities.
Dr Njoroge has, however, maintained that there are adequate greenbacks in the market to meet demand from importers and corporates for dividend payouts.
“Generally, our (target) number is four months of import cover. When it will be below four months then we will be more concerned,” Dr Njoroge said in July when Kenya’s forex reserves dropped below the EAC threshold. “The [EAC] 4.5 months of import cover is not a trigger. In the context of EAC, they talk about expectations which is not the same as a target that you have to hit.”