The International Monetary Fund (IMF) is set to raise Kenya’s cash quota, giving it more headroom to access additional funding and boost its dwindling foreign exchange reserves.
The Business Daily has learnt that the Executive Board of the IMF, the highest decision-making organ of the Washington-based global lender will on Monday increase the quota allocation of special drawing rights (SDRs) for its different member countries with Kenya tipped to be a major beneficiary.
This will help shore up the country’s foreign exchange assets, which have come under pressure from maturing foreign debts.
Kenya’s SDR quota at the IMF is currently at 542.8 million, or Sh91.8 billion (722.95 million), offering the country a critical buffer in case of external shocks.
SDRs are international reserve assets created by the IMF and allocated to members to supplement their existing foreign exchange reserves, allowing them to reduce their reliance on more expensive domestic or external debt for building reserves.
Kenya, which also has a Sh297 billion ($2.34 billion) arrangement with the IMF, has so far utilised 335 percent of its quota or about Sh306.8 billion ($2.416 billion).
Analysts expect Kenya’s SDR quota to rise above 1 billion (Sh169.4 billion) as its share has over the years been lower than that of smaller economies.
“Kenya’s SDR quota is just half of Zambia’s which is a smaller economy than Kenya,” said Mark Bohlund, a senior credit research analyst at REDD Intelligence, an online information platform that provides intelligence and data on emerging market corporates.
Other countries that are likely to benefit from the increase in the SDR quota are Ethiopia and Uganda,” said Mr Bohlund.
SDRs form part of the country’s foreign exchange reserves and have been critical in shoring up Kenya’s balance of payments, including settling external debts.
Besides SDR, foreign exchange reserve is also composed of foreign banknotes, foreign bank deposits, foreign treasury bills, and short and long-term foreign government securities, as well as gold reserves and IMF reserve positions.
Kenya’s foreign exchange reserves dropped to a near ten-year low, further breaching the critical level of four months’ import cover in the wake of huge foreign debt repayments.
Reserves currently stand at Sh871.22 billion ($6.86 billion), equivalent to 3.84 months of import cover, which is the lowest since April 4, 2013, according to the latest Central Bank of Kenya (CBK) data.
Kenya’s reserves have been depleting partly because of repayments to bilateral and commercial lenders and the CBK’s intervention to try and slow down the shilling’s depreciation against the US dollar.
The reserves have remained below the four months’ import cover since January 26, dropping by Sh66 billion during the two weeks.
This emerged in a period when the country was expected to repay foreign debts estimated at Sh63 billion, according to the World Bank tracker of public debt.
The IMF says the SDR is based on a basket of international currencies comprising the U.S. dollar, Japanese yen, euro, pound sterling and Chinese Renminbi.
“It is not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies of IMF members,” says the IMF on its website.
The value of the SDR is set daily by the IMF on the basis of fixed currency amounts of the currencies included in the SDR basket and the daily market exchange rates between the currencies included in the SDR basket.
Wahoro Ndoho, the chief executive of Euclid Capital and former director of public debt management, noted that Kenya’s SDR quota is likely to be increased because the government desperately needs some relief given the harsh state of our economy.
“I wouldn't hazard a guess how much the SDRs will be increased by suffice it to say it may be substantial to reward a government has taken the harsh medicine prescribed (by the IMF) especially in presenting it as its own rather than as imposed from without,” said Wahoro.
Some of the measures that the Government of President William Ruto has taken since he came to power include the removal of consumption subsidies such as that of maize flour.
However, Mr Wahoro opined that the increase in Kenya’s SDR quota will be a temporary respite as the country’s economic challenges are both policy-related and structural in nature.