Forex reserves fall amid debt repayment pressureWednesday July 20 2022
Kenya’s official foreign reserves have fallen to Sh941.5 billion ($7.953 billion) in the week ended July 14, with the import cover dropping to the lowest level in a year at 4.59 months.
The reserves have declined by Sh102.3 billion from the week ended December 30 when they were recorded at Sh1.04 trillion ($8.817 billion) representing 5.39 months’ import cover.
Analysts have attributed the drop to external debt repayments, which remain the biggest source of outflows, including Eurobond coupon repayment made in June.
External debt service in the month of May and June were Sh29.6 billion and Sh31.1 billion respectively according to World Bank Debtor Reporting System.
The Central Bank of Kenya (CBK) said in a bulletin that the reserves were adequate and above its threshold of at least four months of import cover, and the EAC region’s convergence criteria of 4.5 months.
The banking sector regulator, as the custodian of the country’s official forex reserves, usually deploys the hard currency to make external payments such as servicing foreign loans on behalf of the government or paying for State suppliers.
The regulator can also sell dollars in the market to stave off volatility when the shilling is weakening, or alternatively buy hard currency when the volatility is on a strengthening bias.
The drain in government dollar reserves also coincides with the depreciation of the shilling.
Analysts however said CBK has not been selling dollars in the recent past to cushion exchange rate volatility.
The local currency has been under pressure since the start of this year, losing 4.2 percent against the dollar amid the Russia and Ukraine conflict.
An International Monetary Fund loan of Sh27.89 billion ($235.6 million) approved on January 18 for budget support is expected to boost the reserves in the next weeks.