Official foreign exchange reserves held at the Central Bank of Kenya (CBK) dropped by $471 million (Sh51 billion) since the beginning of August, attributed partially to external debt interest payments and efforts to support the shilling against volatility amid an increase in the country’s import bill.
Latest CBK data shows the reserves fell from $ 9.336 billion (Sh1.01 trillion) at the beginning of last month to $ 8.865 billion (Sh960.08 billion) by September 3.
Despite the drop — of which $98 million (10.6 billion) was recorded last week — the reserves still comfortably meet the required statutory minimum of supporting at least four months of import cover.
“The usable foreign exchange reserves remained adequate at $8.865 billion (5.38 months of import cover) as at September 3. This meets the CBK’s statutory requirement to endeavour to maintain at least four months of import cover, and the EAC region’s convergence criteria of 4.5 months of import cover,” CBK stated in last week’s markets bulletin.
The CBK uses the reserves, mainly earned from remittances inflows, foreign debt dollar purchases from the Treasury, tourism and export earnings to service foreign debt, support the shilling and facilitate payment of both private sector and government’s imports in the market in foreign currencies.
CBK does not disclose its operations in the foreign exchange market, but has normally come in to sell dollars when the shilling is deemed to be depreciating too fast (volatility) against the dollar, or otherwise bought forex if the shilling gains too quickly.
The shilling is currently trading at an average of 108.40 units to the dollar, from 107.71 per unit on July 30.
The reserves have in the past few months been boosted significantly by inflows from international financing institutions such as the World Bank, International Monetary Fund and Africa Development Bank, which have lent the country billions of shillings in Covid-related support.
The country is also witnessing a gradual increase in the export earnings and imports as economic activities in countries continue to ease.
However, given Kenya’s status as a net importer, this could have a negative effect on the current account, piling more pressure on the reserves and the shilling.