Markets & Finance

Forex reserves build up to boost price stability


The Central Bank of Kenya headquarters in Nairobi. PHOTO | FILE

Kenya’s forex reserves have shot up $440 million (Sh44.5 billion) from the beginning of the year to hit $7.51 billion (Sh760 billion) as favourable macroeconomic conditions led to higher forex inflows and lower outflows.

Central Bank of Kenya (CBK) dollar reserves are now at a 15 month-high covering 4.89 months’ worth of imports. At the beginning of this year the country had 4.5 month cover at $7.07 billion.

Governor Patrick Njoroge said Wednesday the reserves have been pushed higher by improving export earnings, a stable currency and lower demand from oil importers after crude prices plunged.

“Inflows from tourism and exports like tea and horticulture are strengthening. There are also portfolio inflows, with investors attracted to invest for the long term because of the favourable environment,” said Dr Njoroge.

“The exchange rate has been stable, while there is the impact of lower oil prices that have improved balance of payments. We see the current account deficit this year closing at eight per cent of GDP (gross domestic product).”

Last October, the reserves had dropped below the required four months import cover at $6.25 billion (Sh639.5 billion) amidst a period of shilling volatility that forced the regulator to sell dollars several times to support it.

This year, the shilling has strengthened by 1.1 per cent to the dollar to exchange at 101.2 units. As a result of the stable currency, there has been no call on the regulator to sell dollars in the market, with the market conditions instead favourable for dollar purchases.

Greenback demand from the key import sectors of energy has come down on the back of the low price of oil through the first quarter of the year.

READ: Lower oil prices set to ease Kenya's import bill in 2016

In the international market, a barrel of crude oil is selling at $43, still over 60 per cent down on the price of $115 seen in June 2014 before the current slide took hold. Domestically, motorists are paying Sh80.71 per litre of petrol in Nairobi that is a six-year low.

In addition to the higher reserves, the country has also secured a Sh152 billion ($1.5 billion) standby facility from the International Monetary Fund (IMF) to be drawn in case of shocks to the economy.

The IMF facility combined with the higher reserves help in calming the markets and lowering volatility of the exchange rate by discouraging speculative trading.

Liquidity in the money markets has been fairly balanced in recent weeks.

The interbank rate has been held in a tight range of between 3.7 and 4.9 per cent over the past two months, with liquidity injections through government payments being balanced by open market mop-up operations through the repo market and primary Treasury bill sales.

According to traders, tourism inflows are improving compared to the low levels seen in 2015, with the sector just coming out of the high season which saw hotel bookings look up from the second half of 2015.

Healthy diaspora inflows have also helped. Latest CBK data shows that cumulatively, inflows in the 12 months to January 2016 increased by 9.7 per cent to $1.57 billion from $1.43 billion in the year to January 2015.