Forex reserves dip by Sh52b on low tourism cash, high imports

Kenya’s official foreign exchange reserves (forex) has declined by Sh51.5 billion in less than a month due to a drop in tourist earnings and high import bills.

Latest data from the Central Bank of Kenya (CBK) shows the country’s forex stood at $8,883 million (Sh977.13 billion) as at September 2, down from $9,352 million (Sh1.03 trillion) on August 5.

This was enough to cover the country’s import bill for at least 5.43 months compared to 5.72 months on August 5.

In its Weekly Bulletin, the CBK exuded confidence noting that the reserves “meets the apex bank’s statutory requirement to maintain at least four months of import cover, and the East Africa Community’s (EAC) region’s convergence criteria of 4.5 months of import cover.”

Besides paying for critical imports such as oil, the reserve of hard currencies such as US Dollars and Euros for servicing external loans denominated in foreign currencies.

The drop in currency reserves comes fast in the heels of the widening of the country’s current account deficit - where the value of goods and services imported exceeds that of exports.

The current account deficit widened to 5.4 per cent of the country’s total output or gross domestic product (GDP) in the 12 months to July compared to 4.9 per cent in the same period last year.

“The higher deficit was attributed to lower service receipts as well as high imports, which more than offset increased receipts from agricultural exports and remittances,” said CBK in its weekly bulletin.

The onset of Covid-19 pandemic hit the global tourism market with movement of people restricted as countries sought to curtail the spread of the pandemic. This restriction in foreign travel has negatively affected Kenya’s hospitality and aviation industry which are critical earners of forex for the country.

However, export of flowers, vegetables and fruits, has almost returned to its pre-pandemic levels, replenishing the country’s forex.

Churchill Ogutu, the head of research at Genghis Capital, an investment bank, attributed the widening of the current account deficit to the slight ease in Covid-19 shock in the first half of this year, compared to second last year.

“This has seen exports grow 16 per cent with imports outpacing it at 27 per cent in the first half of 2021,” said Ogutu, adding that the steady flow of diaspora remittances has been the main booster of the country’s pot of hard currencies.

The raid on the country’s hard currency reserves has also put a lot of strain on the Shilling, whose exchange rate against the dollar has been on a free-fall, hitting a seven-month low.

This has hit hard importers who have to pay more for goods and services in the global market. However, it is a boon for exporters who get to earn more when the Shilling weakens.

However, the reserve does not include the equivalent of $738 million (Sh81.1 billion) of special drawing rights (SDRs) that Kenya was allocated by the International Monetary Fund (IMF) on August 23.

The allocation of additional SDR’s, some kind of supplementary foreign exchange reserve assets, is expected to help the country with its balance of payment needs such as paying of foreign-denominated loans.

The country has also received lost of inflows from multilateral lenders such as the World Bank and the IMF - boosting it with the much-needed coffers. To stem exchange rate volatility, CBK has stepped into the market, injecting dollars in what is meant to stabilise the local currency which has been under pressure.