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Forex reserves sink to a 26-month low as Coronavirus hits Kenya’s economy hard

BUSINESS
By Dominic Omondi | March 22nd 2020
Central Bank of Kenya (CBK) holds and manages foreign exchange reserves, is charged with the responsibility for formulating monetary policy to achieve and maintain price stability. [Jonah Onyango/Standard]

The Coronavirus pandemic has hit the economy hard with the Central Bank’s foreign currency reserves dropping to a 26-month low.

The Central Bank of Kenya’s (CBK) foreign exchange reserves dropped to $8,290 million - only enough to cover the country’s imports for 5.04 months.

This is the lowest import cover since the December 2017 electioneering period.

News agency Reuters quoted some traders saying that CBK came into the market to sell the dollars in a bid to salvage the Shilling, explaining the drain to its reserves.

By end of Thursday, reserves had dropped by $119 million from $8,417 million or 5.11 worth of import cover.

“They came in the market to try and control this slide,” a senior trader at one commercial bank told Reuters

Sufficient foreign currency reserves are critical to the payment of the country’s imports from the world market as well as payment of debts to foreigner creditors by both public and private sectors.  

However, the pandemic has seen the country witness low inflow of foreign exchange reserves due to limited exports of flowers, tea and coffee to Europe and North American which are under lockdown.

Other sources of foreign exchange reserves include tourist receipts, which have also fallen after country-restricted travel to tame the spread of the virus.

Europe, which is the main source of Kenya’s foreign tourists, has been hit hard by the virus which has so far claimed over 9,000 lives.

On Friday, the Shilling sunk to a record low, trading at 105.6 against the dollar at some point during the day.

Besides the erratic inflow of dollars, expensive imports have also contributed to the weakening of the local currency.

Diaspora remittances

Another reason that might have contributed to local unit ceding ground against the greenback is the decision by CBK to buy dollars from the market.

However, the Shilling seemed to have recovered from that pressure before Coronavirus re-awakened the pressure.  

Also, diaspora remittances from Kenyans living and working abroad, which are other sources of foreign exchange reserves, too, seem to have been affected by the deadly virus.

Kenya could also replenish its reserve of foreign currencies with borrowed cash.

However, with a jittery market, securing a good credit facility is not going to easy for the country.

Even worse, Kenya is yet to sign up for the International Monetary Fund (IMF) insurance cover that would have provided an additional buffer in case of an external shock.

The country and the global lender have agreed on a three-year stand-by arrangement, though they are yet to finalise on it.

On Thursday, the Shilling was trading at 105.09 against the greenback.

With almost no movement of people from one country to the other, Kenya Airways, among other airlines have been forced to institute cancellations of flights some of its critical hubs citing low demand.

Some experts have even predicted that it will not be long before the global economy sinks into recession.

Kenya has so far confirmed seven cases of Covid-19 of the 254,801 confirmed cases as of yesterday.

Investors at the Nairobi Securities Exchange (NSE) have also lost more than Sh200 billion since Friday, as foreign traders disposed of their holdings and put them into safe bets such as Treasury bonds. 

The NSE management was forced to halt trading after the NSE-20 share index at some point nose-dived by more than five per cent.

With the global economy heading into recession, diaspora remittances from Kenyans living and working abroad, which have supported the shilling for a while, might further take a hit.

The travel industry, critical for earning the country foreign reserves, has been the hardest hit.

Kenya Association of Travel Agents Chief Executive Agnes Mucuha said in a statement that the industry is witnessing a shutdown due to the virus that has slowed down the economy globally.

She explained that the industry recorded a decline in passenger number bookings of 30 per cent, followed by a drastic cancellation of flight bookings, conferences and events resulting in a revenue loss to the sector of 85 per cent.

Covid 19 Time Series

 

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