Experts worry over state of forex reserves

By Jackson Okoth

Kenya: Experts warn that Kenya must increase exports to improve its tattered foreign exchange position. Available figures indicate that reserves held by the Central Bank of Kenya (CBK) has been dropping consistently over several months since July 2013 before picking up again in December, 2013.

This fluctuation has put at risk stability of the Kenya Shilling against major international currencies. Latest data from the Kenya National Bureau of Statistics (KNBS) shows that official foreign exchange reserves declined from Sh385 billion ($4.5b) in July to Sh366.4 billion ($4.3b) in October 2013.

But by December 19, 2013 forex reserves had picked up again to $5.992 billion, equivalent to 4.24 months of import cover.

This was after the International Monetary Fund (IMF) pumped in Sh9.4 billion to further strengthen the foreign exchange position.

“This IMF support is only a short term measure. A long term solution to support the shilling is needed, which includes increasing key exports like tea, coffee and meeting the EU sugar import quotas,” said Kariithi Murimi, a risk consultant.

At present, Kenya has a high import bill which means it is importing more than it is exporting, a trend that impacts on the shilling exchange rate and forex reserves position. Both coffee and tea prices are down on the international market following instability in key markets such as Egypt and a depressed European Union (EU).

The IMF funds were released under a three-year extended credit facility programme approved in 2011 and which has now come to an end.  Instability in Kenya’s forex reserves means CBK has little room to manoeuvre and cannot intervene aggressively in the forex market to deal with currency volatility.

Mopping up

For the most part of 2013, the CBK has intensified the mopping up of the shilling from the forex market and selling dollars to banks in a bid to stabilise the currency.

This operation has taken toll on foreign exchange reserves. Forex reserves held by CBK cushion the shilling from high volatility by assuring importers that there is sufficient foreign currency to pay for imports.

A drop in reserves below the legal limit of four months of import cover diminishes the regulator’s powers to intervene in the forex market in cases of speculative trading.

Forext reserves reached an all-time high of $7958.83 million in September of 2013 and a record low of $853 million in November 1995.