Forex reserves rise to four-month import cover

Tuesday October 27 2015

Kenya's foreign currency reserves rose last week to four months of import cover, providing temporary relief to pressure on the shilling. FILE PHOTO |

Kenya's foreign currency reserves rose last week to four months of import cover, providing temporary relief to pressure on the shilling. FILE PHOTO |  NATION MEDIA GROUP

Kenya's foreign currency reserves rose last week to four months of import cover, providing temporary relief to pressure on the shilling.

Latest weekly data from the Central Bank of Kenya shows that forex reserves stood at Sh652.8 billion ($6.4 billion), equivalent to 4.10 months of import cover as at the end of last week.

The forex reserves have remained below the minimum four months import cover recommended by law for the last six weeks, exposing the country to macroeconomic shocks.

Analysts say the build-up of foreign currency at the Central bank is attributable to increased appetite for government securities by foreign investors.

Currently, interest rates on government securities are above 20 per cent, providing good returns for both domestic and foreign investors.

“Foreigners are attracted to the treasury bills given the return on investment. Therefore, there is increased foreign inflows,” said Eric Munywoki, an analyst at Sterling Capital.

The foreign exchange reserves fell below the recommended levels during the second week of September to Sh642.6 billion ($6.3 billion) equivalent to 3.98 months of import cover, dealing a blow to efforts by the Central Bank to tame depreciation of the shilling against world’s major currencies.

The dollar is currently trading at Sh102 against the dollar, just a few points shy of Sh107, the all-time low experienced in October 2011.

“The improvement in the forex reserves is a good indicator to the currency. From the markets, it shows that there are dollar inflows therefore eliminates the issue of scarcity that would trigger depreciation of the local currency,” said Mr Munywoki.

PRECAUTIONARY LOAN

The increment in foreign exchange reserves removes the need for the government to draw the precautionary loan from the International Monetary Fund in the short term.

In February, the IMF’s executive board approved Sh70 billion ($688.3) billion precautionary loan to Kenya that can be drawn in the event a major depreciation of the shilling occurs to protect the local unit.

To date, the IMF has cleared access to Sh62 billion ($611.8 million) with approval for the release of the remaining amount set to take place early next year.

A weak shilling has resulted into depressed growth of the private sector, with the Purchasing Managers Index (PMI) report prepared by CFC Stanbic bank showing that most firms suffered reduced profit margins during the third quarter.

Inflation increased to 5.97 per cent in September from 5.84 per cent in August, owing to rise in food items and transport resulting from a weak exchange rate.

Both IMF and the World Bank have warned that the low commodity prices currently being experienced will slow down growth for sub-Saharan countries, dampening prospects for economic expansion.