Kenya's forex reserves shrink by Sh51b amid dollar crisis

Foreign exchange reserves are used for State payments such as servicing external debt. [iStockphoto]

Kenya's foreign exchange reserves have dropped by Sh51 billion in the last month, falling to their lowest level in over a decade last Friday amid the raging dollar crisis.

The pool of critical reserves fell for the latest straight week in a row to Sh844.3 billion at the week ending March 9, the Central Bank of Kenya (CBK) weekly statistical supplement showed on Friday.

Foreign exchange reserves are largely tapped for government payments such as servicing external debts and essential government imports such as medicines.

The CBK keeps these stashes of US dollars, euros, Japanese yen and other currencies as a financial safety net.

The reserves, the bulk of which are in US dollars, also serve as backup funds in unlikely emergencies such as the devaluation of the shilling, thus giving confidence to investors.

The CBK can sell these reserves when it wants to boost the value of the shilling and even out volatility. The reserves level is below the CBK's statutory requirement to maintain at least four months of import cover raising jitters.

Import cover

Kenya's economy is highly dependent on imports as the country buys a range of goods.

The reserves are also below the desired 4.5 months import cover recommended by the East African Community (EAC).

The country's pot of foreign currencies has been declining as the central bank deploys the reserves to defend the shilling amid pressures caused by global developments.

The CBK continues to defend the shilling from the mighty dollar's rise.

The US dollar has soared to a 20-year high, forcing central banks around the world such as the CBK to drain reserves in an attempt to stem the depreciation of their currencies.

CBK however on Friday insisted that it has enough reserves, which besides being used for the government's external obligations such as servicing debts and importing certain goods such as drugs, they are also used to smoothen the market, with the regulator getting into the market to sell more dollars when these foreign currencies are inadequate.

"The usable foreign exchange reserves remained adequate at $6.566 billion (3.67 months of import cover) as at March 9," said the CBK in the weekly bulletin. "This meets the CBK's statutory requirement to endeavour to maintain at least four months of import cover."

The drop in the foreign exchange reserves comes at a time when the shilling's exchange rate has depreciated sharply against the US currency.

"The Kenya Shilling remained stable against major international and regional currencies during the week ending March 9. It exchanged at Sh128.59 per US dollar on March 9, compared to Sh127.29 per US dollar on March 2," said CBK.

Dr Njoroge earlier maintained that there were adequate greenbacks in the market to meet demand from importers and corporates for dividend payouts.

"Generally, our (target) number is four months of import cover. When it will be below four months then we will be more concerned," Dr Njoroge said mid-last year when Kenya's forex reserves dropped below the EAC threshold.

The country's forex markets have been marred by a mismatch between dollar demand and supply, with importers saying they are paying higher than official exchange rates published by the CBK.

Manufacturers recently complained that a shortage of the greenback was forcing them to buy it at a premium compared to the CBK's official average exchange rate, a situation they warned could disrupt their manufacturing activities and subsequent product shortages if this is not addressed.

Fuel marketers have also complained of the inability to secure sufficient US dollars to pay for fuel and gain access to their stocks at the Kenya Pipeline Company (KPC) depots, leading to fuel shortages in some Petrol stations across the country.

Retail dollar buyers paid up to Sh141 per unit in banking halls as the demand for the greenback continues to surge.

Four months ago, Deputy President Rigathi Gachagua claimed CBK did not have enough foreign exchange reserves to be used by oil importers, forcing the regulator to fire back with a tutorial to the country's second in command on how the forex market works.

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