Foreign exchange reserves fall by Sh101b as new pressure builds on the shilling
Kenya’s foreign exchange (forex) reserves fell by $ 899 million (101.16 billion shillings) in the past three months through December 9 of this year, sending the local currency to new lows.
Foreign exchange reserves – key to foreign debt repayments and imports – reached $ 8.73 billion (985.44 billion shillings) last Thursday, marking the 13th consecutive week of reduction since the peak of 9.629 billion dollars (1,086 billion shillings) on September 9.
The decline in reserves coincided with a weakening of the shilling, which has touched new lows every day since November 9, according to data from the Central Bank of Kenya (CBK).
The shilling opened yesterday at 112.88 units to the dollar, meaning it has now depreciated 3.27% year-to-date, or 10.2% since mid-March of last year, when Kenya reported its first case of Covid-19.
Currency traders attribute the drop to increased demand for dollars from companies increasing their imports to meet the higher expenses that are traditionally seen during the holiday season.
President Uhuru Kenyatta’s decision to lift the curfew on October 20 and allow bars and restaurants to operate has further boosted businesses.
The continued weakening of the local currency, however, comes despite Kenya receiving debt service relief and receiving disbursements from the International Monetary Fund (IMF) and Eurobond this year.
The debt service suspension initiative, for example, relieved Kenya of a debt burden of 77 billion shillings between January and this month.
The relief, added to the Eurobond proceeds of 112.5 billion shillings ($ 1 billion), the 84.4 billion shillings ($ 750 million) of the World Bank loan and the 81 billion shillings ($ 721 million) from the IMF received during the year is expected to support the shilling.
The continued weakening of the shilling could mean that loan service obligations have remained high, limiting the extent to which the CBK can defend the shilling.
âThere are a lot of debt repayments which make it difficult for the CBK to intervene. The CBK is most likely saving the same dollars to repay foreign currency denominated loans, âa fixed income analyst said on condition of anonymity.
The CBK estimates the current stock of foreign exchange at 5.34 months of import coverage, up from 5.89 months on September 9.
It aims to have reserves of at least 4.5 months of import coverage and considers the upper figures to be more than sufficient.
The continued depreciation of the shilling will result in an increase in the cost of imports such as fuel, cars, industrial machinery, used electronics and clothing, as well as by the country for a higher cost of servicing loans. exterior.
AIB-AXYS Africa noted in its weekend memo that it expects the local currency to come under increased pressure as the import bill rises due to crude oil prices.
“The recent increase in gasoline and diesel prices has contributed to the current depreciation of the shilling,” the brokerage and investment firm said.
“We expect diesel and gasoline prices to continue to rise as they lag behind global oil prices.”
Renaissance Capital said in a Dec. 3 economic research note that the shilling is overvalued and, based on the real effective exchange rate (REER) model, could weaken to 119 units to the dollar next year.
âThe Kenyan shilling is overvalued by more than 20% on our RRSP model, with a fair value of Sh114 per dollar, according to our estimate, which implies that it is prone to depreciate,â the company said.
The RRSP tracks the average of a country’s currency against a basket of other major currencies. The weighting factor in trade balances.
A weaker local currency is generally bad news for a net importing economy, even if it presents gains for exporters.
Exporters of commodities such as coffee and tea generally win in an environment of weakening local currency since they usually receive their money in dollars.