Forex reserves decline as Central Bank of Kenya defends local unit against hard currencies

By Brian Ngugi | Business Daily, Kenya January 3, 2017

Kenya’s foreign currency reserves have progressively fallen for two months, ending at 4.56 months of import cover last week down from 4.60 months the previous week, as the Central Bank of Kenya (CBK) fights to defend the domestic currency.

Latest weekly data from the CBK shows forex reserves stood at Sh697.1 billion ($6.97 billion) equivalent to the 4.56 months of import cover as at the end of last week.

The forex reserves have been heading downwards towards the minimum four-month import cover recommended by law for the last six weeks somewhat exposing the country to macroeconomic shocks.

The dollar is currently trading at Sh102 against the dollar.

As at November 10, the CBK usable foreign exchange reserves stood at Sh753 billion ($7.5 billion), representing 4.93 months of import cover.

Analysts have warned of risk to trade where President-elect Donald Trump has promised to renegotiate nearly all trade deals the US has with various countries and trading blocs around the world.

This could have longer term repercussions on currencies, including the shilling, while the promised tougher immigration rules in the US would affect growth in diaspora remittances that have provided a sizeable share of forex inflows for Kenya and other African countries.

The shilling had remained resilient, depreciating slightly by 0.1 per cent against the greenback, having appreciated by 1.2 per cent against the dollar during the first half of the year.

“This was mainly influenced by the high levels of foreign exchange reserves averaged $7.5 billion, equivalent to 4.9 months, improved diaspora remittances, with cumulative 12 months’ inflows to June 2016 increasing by 11.0 per cent to $1.7 billion from $1.5 billion in the year to June 2015,” analysts at Cytonn noted in a recent report.

However, the shilling has come under pressure going into 2017 following the US Fed Reserve raising its base lending rate amid bid by CBK to defend the shilling.

“Towards the end of the year, the shilling depreciated driven by global dollar strength driven by the Fed raising rates.

“We have seen the Central bank support the shilling leading to a decline in forex reserves to $7.0 billion, from $7.8 billion in October, which has led to the decline in the months of import cover below the one-year average of 4.9 months, to 4.6 months, down from 5.2 months at the start of October,” noted Cytonn report.

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