Central Bank forex reserves rise above import cover limit

The Central Bank of Kenya says that loans released by the International Monetary Fund under the Extended Credit Facility have increased forex reserves, raising the import cover beyond the legal four months requirement. Photos/File  

By GEORGE NGIGI
 

 

Foreign exchange reserves held by the Central Bank of Kenya (CBK) have jumped above the minimum four months import cover limit for the first time since 2010, cushioning the shilling against volatility caused by weak forex balance.

New data released by the CBK shows foreign exchange reserves held by the regulator increased by Sh15.2 billion ($183 million) last week, raising the forex import cover beyond the legal four months requirement.

“The usable official foreign exchange reserves held by the Central Bank increased to $4,6 billion — equivalent to 4.05 months of import cover- in the week ending April 26, ” said the Central Bank in its latest weekly bulletin.

“The increase in the foreign exchange reserves in the week is largely attributed to release of funds by the IMF (International Monetary Fund) to Kenya under the Extended Credit Facility.”

Adequate foreign currency reserves give the banking sector regulator capacity to smoothen fluctuations of the exchange rate through market interventions that stabilise the currency.

The import cover is a measure used to assess availability of foreign currency to finance the national imports basket. In the second-half of last year, the shilling depreciated rapidly touching an all-time-low of 107 units to the dollar in October, which was attributed largely to speculative attacks by currency traders, taking advantage of a widening balance of trade deficit.

The IMF released $111 million last week, as part of the foreign exchange support loan signed early last year.

The shilling has since strengthened to about 83 units to the dollar.

The Central Bank has been keen on accumulating foreign exchange reserves to ward off speculators who capitalise on any decline to make profits on trading the currency. The reserves stood at $4 billion, equivalent to 3.6 months of import cover, at the turn of the year.

Purchases of dollars in the currency market and inflows of foreign currency from buyers of Treasury securities also help to boost the reserves.

The CBK has maintained a constant presence in the foreign currency market, but dealers said its interventions have been well spread out to avoid shifting the market significantly.

“Though they (CBK) have been buying, the shilling has been stable,” said Philip Wambua, the head of trading at Bank of Africa. The achievement of the four-month cover moves the regulator closer to the six-month criterion for the East African Community monetary union, where Kenya has been lagging behind.

Diaspora remittances

Unlike neighbouring East African countries that rely heavily on foreign aid to accumulate foreign exchange, Kenya has a more diversified source of reserves that also includes the open currency market and normal transaction exchanges such as diaspora remittances.

READ: Remittances from Kenyans abroad to grow further in 2012


 

“Market participation is a better measure of the health of the economy,” says Mbui Wagacha an independent macro-economic consultant.

The IMF has warned that accumulation of reserves was not enough if its is not backed by policies that promote a more favourable balance of payment position.

Kenya’s imports have been growing at a faster rate than exports, leading to reversal of the total surplus of $163 million in 2010 to a deficit of $43 million last year, which contributed to the rapid depreciation of the shilling.

Dr Wagacha, however, holds that the huge import bill is in line with the current phase of the economy, which is mainly driven by infrastructure development that is machine and fuel intensive.

 

“After the developments we are bound to have infrastructure dividends, which include private sector investments, rapid movement of goods and services resulting in a bigger economy so the imports to GDP ratio will fall,” he said.