Central Bank of Kenya (CBK) Governor Kamau Thugge will today steer his first monetary policy committee (MPC) amid rising inflation and a weakening shilling.
Dr Thugge and his inflation-targeting MPC colleagues will sit this afternoon at a time the pool of critical reserves held by the CBK shrunk again after a brief jump, diminishing the apex bank's firepower to stabilise the weakening shilling amid a dollar surge.
In a sign of fresh trouble for the new CBK boss, Kenya's foreign exchange reserves have dropped by Sh21.7 billion in the last two weeks to Sh1 trillion in the week ending June 22, the CBK weekly statistical supplement showed on Friday.
There was relief weeks earlier for the banking regulator after the CBK's forex war chest rose to a new high of Sh1.040 trillion as of June 8 on the back of crucial receipts such as loans from bilateral lenders.
This was higher than the Sh900.8 billion recorded a week earlier on 31 May.
The reserves shrunk as the shilling on Friday hit an all-time low against the dollar, signalling inflation and higher cost of imported goods.
The weakening of the shilling has triggered fears of a fresh round of inflationary pressure, which is set to become a political headache for the new government.
CBK data shows the shilling exchanged at an average of 140.4029 on Friday, setting up the country for more expensive imports, electricity and debt servicing distress.
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 country's pot of foreign currencies had in recent weeks witnessed a steady decline as the central bank deployed 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 two-decade-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 $7.375 billion (4.06 months of import cover) as of June 22," said the CBK in the weekly bulletin.
"This meets the CBK's statutory requirement to endeavour to maintain at least 4 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 relatively stable against major international and regional currencies during the week ending June 22. It exchanged at Sh140.31 per US dollar on June 22, compared to Sh139.71 per US dollar on June 15," said CBK.
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.
Retail dollar buyers are paying up to Sh150 per unit in Kenyan banking halls as the demand for the greenback continues to surge, according to a Standard spot-check.
This is as the margin between the US dollar's printed rate by the CBK and the market rate for customers quoted by banks and foreign exchange bureaus continues to widen.
Kenya's economy is highly dependent on imports as the country buys a range of goods.
