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We have enough foreign exchange reserves, CBK assures investors

Central Bank Governor Patrick Njoroge speaking when Safaricom announced 50 percent reduction in Fuliza interest charges on 28th September 2022. [Wilberforce Okwiri, Standard]

Central Bank of Kenya on Sunday night rushed to reassure the market that it has adequate foreign exchange reserves and it is well positioned to self-insure the country against potential shocks.

The assurance by the Central Bank came hours after Deputy President Rigathi Gachagua said in remarks to a local television station that the Central Bank lacked enough foreign exchange reserves to facilitate the import of oil.

But CBK in a swift rejoinder dismissed the claim, noting that it had adequate forex enough to cover the country’s import needs for 4.19 months as of September 29, this year.

“The CBK foreign exchange reserves, therefore, continue to provide adequate cover and a buffer against shocks in the foreign exchange market,” said the CBK.

However, this is below the East African Community (EAC) threshold of 4.5 months of import cover and analysts said yesterday the darkened outlook on the country’s reserves by the Deputy President could spook investors and raise jitters.

The country, earlier in the year, recorded funding pressures in the market for dollars as investors and companies rushed to get their hands on the greenback.

Manufacturers consequently raised the alarm on a dollar shortage and cited a struggle to settle payments to oversee suppliers on time.

“Investors like politicians who talk, because they often say things Central Bankers prefer to keep discreet,” said Deepak Dave, an analyst at Riverside Advisory.

“So they will keep a close eye on the true exchange rates, the news of oil shortages, (and) many ways to monitor the realities.”

The sustained drop in the country’s forex - assets held on reserve by a central bank in foreign currencies - has put Kenya in a precarious position in case of a sudden surge in external obligations, analysts say.

Foreign currency reserves are generally held for traditional operational purposes as well as for precautionary and non-precautionary policy objectives.

Traditional operational purposes include facilitating regular international debt and import-related payments made on behalf of the government; smoothing out payment schedules; serving as collateral to relax external borrowing constraints; or underpinning monetary policy with respect to liquidity operations.

From a precautionary perspective, countries hold reserves as a buffer to absorb or self-insure against the balance of payment shocks, including sudden stops in international capital flows; to provide foreign currency liquidity to banks in stressed situations, and to mitigate volatility in foreign exchange markets.

While appearing in an interview on Citizen Television (Kenya) on October 2, the Deputy President alluded to a similar shortage.

Tumekosa maneno ya Foreign Exchange hata jana pale katika benki kuu hakukuwa na zile pesa za kigeni za kutosha kuagiza mafuta kutoka nchi za nje (We don’t have foreign exchange reserves. Even yesterday there was no enough foreign exchange at Central Bank to buy oil from foreign countries),” Mr Gachagua was recorded saying during the interview

But in a rejoinder, the CBK, noted that oil importers get their foreign exchange reserves from commercial banks and not the regulator.

The financial regulator noted that following the complete liberalization of the foreign exchange market in the 1990’s, all foreign exchange for private transactions is obtained from commercial banks.

“CBK does not supply foreign exchange for transactions other than for the  National Government ( government’s own imports or debt service payments) or CBK’s operations,” it said.
“Oil importers, therefore, obtain their requisite foreign exchange from the commercial banks and not CBK,” said CBK.

With little reserves, the country can find itself struggling to meet some of its obligations including servicing foreign debts and importing critical supplies such as fuel, fertiliser, food, drugs and machinery.

This year, the highest reserves of foreign currency were on January 13 at $8.764 billion (Sh1.06 trillion).
However, this dropped to a low of $7.346 billion (Sh885.56 billion) on September 8, which means that forex levels dropped by Sh171 billion in this period.

CBK Governor Patrick Njoroge, in an interview with Bloomberg TV, recently expressed his fears over the rapid increase in interest rates in advanced economies, saying this is likely to hurt Kenya’s external position.

This is the third time in as many weeks Dr Njoroge has assured the country has adequate foreign exchange reserves.
Amid the scramble to reassure the market, the shilling on Monday hit an all-time low against the dollar, signalling inflation and higher cost of imported goods.

The continued loss of the shilling against the dollar had seen the CBK intervene to cushion further loss.
CBK data shows the Kenyan shilling exchanged at an average of Sh120.7765 on Monday, setting up the country for more expensive imports, electricity and debt servicing distress.

The shilling has been on the back foot in recent weeks on the combination of weak inflows and strong dollar demand across sectors, traders had said earlier.

Dr Njoroge, last month, caused jitters when he insisted the pressure on the shilling in the recent past had nothing to do with market forces.
“I want to assure you that we have an adequate foreign exchange,” said Dr Njoroge.
“What was happening is that in the (last) two to three months we had people that were trying to bring us back to Goldenberg.”

Kamlesh Pattni, was the tycoon behind the Goldenberg International firm, the vehicle in the 1990s through which a fortune in Central Bank funds was siphoned out of the country in Kenya’s biggest graft case.
The Goldenberg scam involved government payments to his firm for gold and diamond exports which prosecutors say never happened.

“If you remember what was happening with Goldenberg, this is what some of the people were pushing towards,” said Dr Njoroge, who is serving his final term as the CBK boss without divulging additional details.
“I don’t want to get into the details because they will ask me where is the proof and I will say I don’t have proof. I’m not the DCI”.

Dr Njoroge had earlier in June underplayed the level of depreciation of the shilling and disputed claims on the constraints in dollar supply.

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