Reprieve as Kenya's forex buffer ups by Sh51b on IMF loan boost

Central Bank of Kenya (CBK). [Jonah Onyango, Standard]

Kenya's foreign currency reserves have experienced a significant increase of Sh51.3 billion, reaching almost the necessary threshold of four months' worth of import cover, in just sixteen days after receiving a substantial loan from the International Monetary Fund (IMF).

The pool of critical reserves surged to Sh1.1 trillion ($7.134billion), equivalent to 3.81 months of import cover, in the week ending February 1, the Central Bank of Kenya (CBK) weekly statistical supplement showed on Friday.

The forex buffer stood at Sh1.09 billion ($6.81 billion) or 3.62 months of import cover two weeks earlier as of January 18th.

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 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 IMF last month approved a $941 million (Sh150 billion) lending boost to Kenya, with an immediate disbursement of $624.5 million (Sh99.9 billion) offering some relief to the Kenya Kwanza administration as it battles financial pressures.

The disbursement under the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) programs would also be topped by a release of $60.2 million (Sh9.6 billion) under the Resilience and Sustainability Facility (RSF) arrangement.

The IMF's total funding commitment to Kenya under all three facilities now comes to more than $4.4 billion (Sh704 billion).

The Ruto government is grappling with acute liquidity challenges amid uncertainty over its ability to access funding from financial markets before a $2 billion (Sh320) Eurobond matures in five months (June 2024).

Kenya's balance of payments and financial positions have also been strained by the legacy of the COVID-19 pandemic and frequent climate change-induced droughts, according to the IMF, while its shilling currency has weakened.

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

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 rise in the foreign exchange reserves comes at a time when the shilling's exchange rate has been depreciating sharply against the US currency.

In the last few days, the shilling has been steady at around Sh160 to the dollar.

Retail dollar buyers are however paying upto paid up to Sh167 per unit in banking halls as the demand for the greenback remains elevated.

The import cover acts as a buffer against external shocks that may impact a country's balance of payments. External shocks, such as a sudden increase in oil prices or a decline in export revenues, can strain a country's foreign exchange reserves and hinder its ability to finance imports.

Adequate import cover provides a cushion against such shocks, allowing a country to continue importing necessary goods without depleting its foreign exchange reserves excessively. This buffer helps to stabilise the economy and mitigate the adverse effects of external shocks.

It indicates the ability of a country to meet its import requirements without facing a shortage of foreign currency. A higher import cover indicates a more robust position, while a lower import cover suggests vulnerability to external shocks.

In times of crisis, such as natural disasters, political instability, or global economic downturns, a country's ability to maintain economic stability becomes crucial. One of the key factors that contribute to this stability is import cover, which refers to the ability of a country to finance its imports. Import cover is an essential component of a country's economic resilience, as it ensures the availability of necessary goods and services even during challenging times.

Import cover is a measure of a country's ability to pay for its imports over a specified period, usually expressed in terms of the number of months or weeks that a country's foreign exchange reserves can cover its average monthly or weekly import bill. It is calculated by dividing a country's foreign exchange reserves by its average monthly or weekly import value.

For instance, if a country has foreign exchange reserves worth $100 billion and its average monthly import bill is $10 billion, then its import cover would be 10 months.

Therefore adequate import cover ensures that a country can continue to import essential goods, such as food, medicine, and energy resources, even when its production capacity is compromised. For example, during the Covid-19 pandemic, countries with higher import cover were better equipped to handle the increased demand for medical supplies and equipment.

Import cover also contributes to maintaining confidence and stability in a country's economy. When a country has a robust import cover, it signals to foreign investors, lenders, and trading partners that it has the financial capacity to honor its international commitments.

This, in turn, fosters trust and confidence in the country's economy, attracting foreign investment and facilitating trade relationships. Conversely, a low import cover may lead to concerns about a country's ability to meet its import obligations, potentially leading to capital flight, currency devaluation, and economic instability.