Forex reserves dip to 10-year low amid debt repayments

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

By KEPHA MUIRURI More by this Author

Kenya’s foreign exchange reserves dropped to the lowest in seven years, further breaching the critical level of four months’ import cover in the wake of huge foreign debt repayments.

Reserves currently stand at Sh869 billion ($6.939 billion), equivalent to 3.88 months’ import cover, according to the latest Central Bank of Kenya (CBK) data.

Kenya’s reserves have been depleting partly because of repayments to bilateral and commercial lenders and the CBK’s intervention to try and slow down the shilling’s depreciation against the US dollar.

The shilling has remained on a steady decline against the dollar, exchanging at Sh125.24 on Monday in contrast to Sh113.63 at the same time last year.

The reserves have remained below the four months’ import cover since January 26, dropping by Sh66 billion during the two-week period.

This emerged in a period when the country was expected to repay foreign debts estimated at Sh63 billion, according to the World Bank tracker of public debt.

The reserves are used by countries to meet their international financial obligations such as paying foreign debts, influencing monetary policy and supporting the importation of critical goods.

The size of the official reserves usually projects an air of confidence and calms investors’ fears in the event they want to move their money out of a country.

“The one lever that the government has the least control of is currency as they can’t generate foreign exchange. Reserves don’t serve any purpose beyond providing confidence and that has already been lost. So even if the worry is about the reserves, what lever does the CBK have beyond depreciating the currency?” a financial sector analyst posed.

Kenya has over the years relied on external financing to replenish its reserves but now faces the prospect of having to make debt repayments without sufficient inflows, according to another analyst.

The government is betting on debt inflows to shore up the reserves, with concessional funding from the World Bank and the International Monetary Fund (IMF) expected to boost the forex cover.

Previous disbursements from the multi-lateral lenders have had the effect of lifting the reserves to new highs.

Kenya now waits for the disbursement of Sh93.9 billion ($750 million) from the World Bank by June this year and continued flows from IMF’s 38-month Sh293.1 billion ($2.34 billion) programme.

The country is further betting on re-entry to the international capital markets to rebuild the cover through the issuing of either a Eurobond or a syndicated loan.

Analysts who spoke to the Business Daily say Kenya faces limited options in attracting new forex inflows, with raising yields on domestic government debt instruments one of them.

The move deployed by countries such as Zambia has the effect of bloating government debt service costs.

While Kenya targets keeping reserves at a minimum of four months of estimated imports, the central bank has previously maintained that its fall should not cause alarm, terming the breach of the limit a ‘non-event’.

“It’s not like a trap that when you get in, you get caught. It’s not an accident that something happens when you are below that number. We still believe we have adequate reserves to smooth out any volatility. We are also doing our best endeavours to ensure we get reserves,” CBK governor Patrick Njoroge said on November 24, 2022.