Kenya third largest domestic user of dollars in the EAC

What you need to know:

IMF report shows that Uganda has the most dollarised economy in the region, followed by Tanzania while the least dollarised is Burundi.
The latter also happens to be the smallest in terms of the annual gross domestic product in the Community.

Kenya is third in the usage of the dollar for domestic transactions in the East African Community countries according to a newly released report by the International Monetary Fund (IMF).

The report shows that Uganda has the most dollarised economy in the region, followed by Tanzania while the least dollarised is Burundi.

The latter also happens to be the smallest in terms of the annual gross domestic product in the Community.

The IMF measures financial dollarisation in an economy to be represented by the foreign currency deposits and loans in commercial banks.

Kenya has in the past few years kept high amounts of dollars in reserves and has also a facility with the IMF to access up to Sh155 billion ($1.5 billion) in the case of emergency.

Currently Kenya and Uganda hold official foreign currency reserves equivalent to 4.7 and 5.1 months of imports, respectively.

READ: Forex reserves on a downward as CBK sells dollars

The multilateral lender has in the report recommended that countries with big transactions in dollars also keep a bigger amount of reserves in the same currency, indicating that Tanzania and Uganda should have dollar amounts of not less than 4.5 months of imports.

“Given the high level of financial dollarisation, staff recommended maintaining international reserves at about 4.5 months of prospective imports rather than the earlier target of four months of imports,” the IMF said in its latest report on the Tanzanian economy, but also focusing on the other EAC countries.

In a working paper released last year, the IMF staff indicated that dollarisation was partly a result of increasing remittances, where receivers lacked awareness and knowledge of deposit insurance that would boost their confidence on using the banking system for the deposits.

The paper noted that many people were sending cash in dollars to people abroad without using the formal bank channels, which would convert them into local currency for withdrawal by the targeted customers.