Treasury paid foreign creditors a massive Sh140 billion in three months, piling pressure on the country’s foreign exchange reserves.
Increased demand for foreign currency also emanated from traders whose demand for goods increased after money in bank accounts increased by a whopping Sh50 billion between March and June this year.
Increased money supply in banks was due to the decision by State corporations to settle part of their pending bills even as some Kenyans moved about Sh25 billions of their “under-the-mattress” savings into bank accounts. This was seen as a frantic effort to beat the September 30 deadline for returning the old Sh1,000 banknotes.
As a result, Treasury said in its latest Budget Review Outlook for the fourth quarter, the shilling weakened to exchange at 104.2 against the US dollar on July 7, a four-year low since October 2, 2015, when 104.39 units of the local currency fetched one greenback.
This resulted in an increase in prices of vital imported products even as the country’s foreign debt rose.
The country’s foreign debt service increased by Sh10 billion from an initial target of Sh256 billion to Sh266 billion as the shilling took a plunge.
Kenya was to pay to China Sh7.6 billion but ended up paying Sh9.5 billion. A good chunk of this difference was due to payment of the dollar-denominated sovereign bond, Eurobond, and syndicated loans from commercial banks which increased by Sh6 billion.
Foreign interest payment, which is not refinanced but paid directly from State coffers, amounted to Sh103 billion. This was an increase of close to a third compared to the last financial year’s Sh81.6 billion. Things would have been worse if it were not for increased remittances from Kenyans living and working in the diaspora who sent home a record Sh78.4 billion during this period, helping to stabilise the shilling.
In June, the remittances hit a record Sh30 billion. The record inflows coincided with the lapse in the amnesty the Government had offered those who had hidden cash in off-shore accounts.
CBK Governor Patrick Njoroge has insisted that increased inflow in diaspora remittances has little correlation with the amnesty that was given by suspended National Treasury CS Henry Rotich in his 2018/19 budget statement.
Treasury also talked of the local currency’s relatively less volatility compared to most sub- Saharan Africa currencies, in what is attributed to improved export earnings.
“This stability reflected strong inflows from tea and horticulture exports, resilient diaspora remittances, and improved receipts from service sector particularly tourism,” said Treasury.
However, increased foreign inflows did not stop CBK from plunging into the market in a bid to stabilise the exchange rate through open market operations.