Dollar reserves decline on debt repayment, reduced borrowingTuesday September 06 2022
Kenya’s foreign exchange reserves dropped by Sh44 billion ($365 million) in August to Sh886 billion ($7.38 billion) on debt repayments to bilateral and commercial lenders, edging towards the minimum cover of four months of imports.
Kenya paid $110 million (Sh13.2 billion) to the Trade and Development Bank (TDB) in principal and interest on syndicated loans, while semi-annual interest payments for the $2 billion (Sh240 billion) Eurobond issued in February 2018 ate up another Sh9.3 billion ($77.5 million).
Interest and principal payments to the World Bank’s International Development Association (IDA)— which largely offers concessional loans to the world’s poorest developing countries — stood at Sh5.9 billion ($49.4 million) during the month.
Kenya’s reserves have been on a steady decline for months on reduced external borrowing due to high-interest rates and a decline in remittances from the diaspora.
The CBK normally replenished its dollar pile from proceeds of the government’s external loans, which it buys from the Treasury in exchange for shillings for deployment into the domestic economy.
The reserves, which have already dropped below the East Africa Community (EAC) preferred threshold of 4.5 months of import cover, are now approaching the country’s set minimum of four months cover, highlighting the balance of payment challenges that lie ahead should there be no significant injection either through external loans or domestic open market purchases.
“The usable foreign exchange reserves remained adequate at $7,375 million (4.2 months of import cover) as at September 1,” said CBK in its weekly markets bulletin released last Friday.
Other than debt repayments on behalf of the Treasury, the CBK also deploys the reserves to make payments for the government’s overseas purchases, and also makes sales in the open market to banks when looking to stem exchange rate volatility.
There is also the background of elevated demand for the greenback from importers, which has seen the shilling decline to historic lows of 120.20 units against the dollar in the forex market.
Kenya is a net importer of intermediate goods and raw materials for industrial use in the manufacture of basic household items cooking oil which means currency costs get passed on to locally produced goods.
The country also spends billions importing a wide variety of goods, including petroleum products, wheat, second-hand clothes, motor vehicles, vegetable oils and industrial machinery, whose costs are rising as the shilling weakens against the dollar.
Challenges facing the government in accessing external loans due to rate concerns have weighed on the reserves as well. The country recently cancelled a $1 billion Eurobond issuance and shelved plans to raise a similar amount through a syndicated loan due to high interests charged at the international market.
Diaspora remittances from the United States have also fallen by a monthly average of three percent this year, reflecting the sharp cost of living in the world’s largest economy which has cut the disposable income available to Kenyans for support of relatives back home.