Kenya’s foreign exchange reserves dropped by $487 million (Sh63.9 billion) last week after the country repaid a significant part of its external debt, bringing down the resources that are critical in supporting the local currency.
The forex reserves declined to $7.409 billion on July 18 from $7.896 billion on July 11, according to the Central Bank of Kenya’s (CBK) latest weekly bulletin.
This current level of reserves can support 3.9 months of import cover, down from previous 4.1 months. Import cover is the number of months that can be financed with foreign exchange reserves available at the CBK.
Kenya pays for its imports in hard currencies –mainly the US dollar. The CBK, which is the government’s fiscal agent, has a target of maintaining at least four months of import cover.
The decline in the forex reserves came after the government spent $533 million (about Sh70 billion at current exchange rates) to repay external loans.
These include $433 million (Sh56.8 billion) that went to service a China loan which financed the construction of the standard gauge railway. January and July usually account for the bulk of the payments due on the SGR debt.
Kenya borrowed $5.08 billion (Sh667 billion) in 2014 and 2015 to build the Mombasa-Naivasha railway.
The SGR loans, denominated in dollars, are on a mix of commercial and concessional terms.
The remainder of the July debt payments went to various bilateral and multilateral lenders including France and the World Bank.
The forex reserves had been boosted ahead of the recent payments, with the receipt of a $1.2 billion World Bank loan mid last month lifting the resources to $8.32 billion on June 20.
This was equivalent to an import cover of 4.3 months, coinciding with the strengthening of the shilling which had gained to trade below Sh130 to the dollar.
The local currency, which had traded at lows of Sh163 to the greenback at the start of the year, started weakening in the past two weeks to exchange at more than Sh131 to the dollar.
The CBK says higher remittances have helped to support the local currency, with the inflows in June alone amounting to $371.6 million compared to $345.9 million in the same month last year.
“The cumulative inflows for the 12 months to June remained steady at USD 4,535 million compared to USD 4,017 million in a similar period in 2023, an increase of 12.9 percent,” the CBK said.
“The remittance inflows continue to support the current account and the foreign exchange market.”
Tourism, another major source of foreign exchange, has come under pressure from the ongoing protests in various parts of the country including the capital Nairobi. The sector could suffer substantial losses if the protests persist.
