Forex reserves drop below $7bn as CBK defends shilling

The Central Bank of Kenya in Nairobi County on January 28, 2024. 

Photo credit: File | Nation Media Group

Kenya’s foreign exchange reserves have dwindled back to below the $7 billion (Sh1.019 trillion) mark for the first time in five weeks, reversing an upward trajectory and signalling reduced capacity for monetary authorities to support the shilling.

Data from the Central Bank of Kenya (CBK) indicates that forex reserves declined by $259 million (Sh38 billion) to $6.96 billion (Sh1.012 trillion) as of Thursday last week, a 3.6 percent drop from the $7.22 billion (Sh1.05 trillion) a week earlier. This is equivalent to 3.7 months of import cover.

The country’s forex reserves had hit the highest level in over five months on February 22, coming on the back of two concessional foreign loans that also saw the shilling rally against major currencies after nearly a year of freefall.

Ideally, the CBK wants to keep the forex reserves, which serve as a cushion for the country’s economy, at no less than $7.41 billion (Sh1.07 trillion) or four months’ worth of imports, which is indicative of the country’s long-term economic buoyancy.

The reserves had remained below $7 billion for almost half a year and jumped to $7.02 billion at the end of January, a week after the International Monetary Fund (IMF) and the Trade and Development Bank (TDB) pumped some money into the economy.

IMF on January 17 released $682.3 million (Sh109 billion) to Kenya, days after the TDB sent $210 million (Sh33.7 billion) significantly boosting the country’s reserves of foreign currencies.

Consequently, the shilling staged a major rally against major currencies, appreciating from Sh163 per US dollar, for instance, to the current Sh144.5, a rate last witnessed in September, when reserves stood at $7.08 billion.

CBK had attributed the rise to increased export income and a drop in import bills. The drop could point to a reversal of the trend.

Analysts say it could be a result of interest and principal repayment by the CBK, coming after the government settled part of the $2 billion Eurobond maturing this June.

“The reserves normally dwindle when the Central Bank repays interest or principal on government debts, and rises when it receives a foreign loan,” said an expert who requested to remain anonymous.

The drop in forex reserves could, however, put a strain on dollar supply, which could cause the shilling to reverse the gains made over the last month, and depreciate further against major currencies.

Last week, a survey by Barcelona-based FocusEconomics, which polled economists and analysts from leading banks in Kenya, revealed that the experts forecast the shilling to slide beyond the Sh160 mark to the dollar by year-end in what will undo the recent gain.

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