Kenya’s net foreign assets decline 52pc in February

Kenya's net foreign assets have shrunk 51.8 percent in the year to February 2023. FILE PHOTO | SHUTTERSTOCK

  By ELIZABETH KIVUVA More by this Author  

Kenya's net foreign assets have shrunk 51.8 percent in the year to February 2023, reflecting the high debt-serving obligations by the government amid the

dollar shortage in the market.

The latest data from the Central Bank of Kenya (CBK) shows that the assets declined to Sh227.1 billion as of February, from Sh470.9 billion in February 2022.

Net foreign assets (NFA) refer to the net value of total foreign assets owned by a country’s monetary authorities and banks, minus the foreign liabilities of those entities.

The drop continues a downward trend from 2019 that has seen Kenya lose more than Sh600 billion.

The data shows that the net foreign assets declined by 51.9 percent from Sh589.3 billion at the end of December 2021 to Sh283.4 billion at the end of December 2022.

The assets including reserves at International Monetary Funds (IMF) have declined from a high of Sh800.67 billion recorded in the year ended December 2019.

The drop comes amid a growing country’s debt stock and weakening shilling meaning ballooning debt, especially loans borrowed in foreign currency.

Read: Kenya's foreign wealth declines by Sh87 billion

“The decline in net foreign assets partly reflected a reduction in reserves at the Central Bank due to scheduled debt service, and the increase in commercial bank’s borrowing from foreign sources,” CBK stated.

The shortage of US currency that hit the local market since mid-last year due to rising interest rates in the developed economies and strong demand from manufacturers and importers has also worsened the crisis, resulting in the decline in the currency held by banks and other financial institutions.

Analysts say the shortage of dollars remains the biggest impediment to bringing back foreign investors who have fled the Nairobi Securities Exchange, in fear that developments would hurt their returns and made it difficult to liquidate their positions.

“The decline in NFA between December 2022 and February 2023, was mainly attributed to the decline in CBK’s NFA by $794.9 million as it met its foreign currency obligations that came due. With FX reserves majorly supported by external budget support flows, the external buffers dipped by an equivalent amount,” said Churchill Ogutu, an economist at IC Asset Managers.

The government uses the forex reserves for repayment of external loans and importing critical goods such as drugs and fertiliser.

This means a dip into the usable foreign currency reserves, a move that reduces the NFAs.

The external debt service obligations in six months to December 2022, amounted to Sh178.6 billion - combining principal repayment at Sh111.5 billion (62.5 percent) and interest at Sh67.0 billion (37.5 percent), Treasury data shows.

The net foreign assets held by Central Bank declined from Sh613.9 billion in February 2022 to Sh450.4 billion in February this year, when dollar inflows from agricultural exports and tourism failed to keep up with demand.

Those in banks have been in a negative position since April 2021 with a deficit of Sh13.7 billion, widening to a Sh223.3 billion deficit as of February.

The banks carried a positive position of assets at Sh316 million in March 2021.

“Although commercial banks' NFA position remained in a negative position of $1.76 billion, there has been a gradual accumulation of foreign currency assets ($719.1mn) that more than offset the foreign currency liabilities, the deposits that grew by $370.7 million in the period,” Mr Ogutu added.

“Going forward, expect a more improved NFA position in the overall banking system with the expected USD financing inflows that will shore up CBK external buffers.”

Since April last year, the banking industry lobby group, the Kenya Bankers Association, advised on dollar shortage attributed to strong demand as companies remitted dividends and need to meet their overseas supplier obligations in the wake of the strong post-Covid-19 recovery.

Read: Rich Kenyans sit on Sh922bn in dollars as shilling weakens

Banks imposed a daily cap on dollar purchases of as little as $5,000 as firms struggled to obtain adequate forex to meet their supply needs.

Foreign investor participation at NSE plunged to a record low of 30.1 percent in March.

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