Forex buffer hits above 4 months cover on IMF loan

The Central Bank of Kenya, Nairobi. FILE PHOTO | NMG

Kenya’s foreign exchange reserves have risen to $7.537 billion (Sh925.6 billion) after the International Monetary Fund (IMF) disbursed Sh81.7 billion last week, improving the country’s forex buffer amid increasing pressure on the local currency.

This was a jump of $462 million (Sh56.9 billion) and is enough to cover the country’s import needs for 4.22 months, the highest import-cover since September 22, a weekly bulletin by the Central Bank of Kenya (CBK) shows.

The IMF disbursement—which also included an additional funding of Sh26.6 billion to help address the crippling effects of drought—pushed the country’s foreign exchange reserves (forex) above the required statutory import cushion of at least four months, the first time since in 35 days.

This has buffered the country’s external position whose poor position had been weakened by reduced inflow of foreign financing due to a tighter liquidity in the global financial market that saw the country abandon plans to issue a $1.1 billion (Sh135.5 billion) Eurobond.

Forex reserves have also been impacted negatively by a faster growth in imports than exports even as diaspora remittances, which have come to play a critical role in stabilising Kenya’s exchange rate, have also underperformed. The result has been a shortage of dollars in the Kenyan market, with a jump in the cost of critical raw materials such as fuel, wheat, fertiliser in the global market hurting importers even more.

A jump in the cost of these raw materials against a weaker shilling has also resulted in imported inflation, with the retail price of such consumer items as wheat flour, maize, cooking oil, soaps, toilet papers skyrocketing as their cost of production went up.

Global rating agency Fitch downgraded Kenya’s credit score to B citing, among others, the dwindling reserves of hard currencies amidst tightening liquidity in the global financial markets that has made it difficult for the country to issue its fifth Eurobond.

“The usable foreign exchange reserves remained adequate at USD 7,537 million (4.22 months of import cover) as at December 22. This meets the CBK’s statutory requirement to endeavor to maintain at least 4 months of import cover,” said CBK.

By December 15, Kenya’s stock of foreign currencies and assets, most of which are US Dollars, were at $7.075 billion, or enough to cover 3.96 months of the country’s import needs.

Observers, including IMF and Fitch, expect the level of forex reserves to decline further by the end of the year, before picking up next year.

The government uses the forex reserves for repayment of external loans as well as importing critical goods such as drugs and fertilizer from the global market.

Reserves also serve as a backup funds in the unlikely emergencies such as the weakening of the Shilling, with the CBK getting into the market to sell dollars to forex traders such as bank and forex bureaus to reduce volatility.

Since July, forex reserves have been below the desired 4.5 months of import cushion recommended by the seven-nation East African Community (EAC) trading bloc.

However, during a press briefing in July, CBK Governor Dr Patrick Njoroge, downplayed the significance of the EAC’s 4.5 months import cover limit, arguing that it does not give the regulator a target.

“Generally, our (target) number is four months of import cover. When it will be below four months, then we will be more concerned,” said Njoroge during a press briefing in July when forex reserves dropped below the EAC threshold.

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