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NEWS & CURRENT AFFAIRS

The Nairobian

Price hikes loom as forex reserves set to hit 11-year low

Stocks & Markets

By Dominic Omondi | Oct 20, 2022

**The country's pot of foreign currencies has been declining.** [iStockphoto]

The International Monetary Fund (IMF) has projected Kenya's foreign exchange reserves (forex) to fall below the four-month import cover for the first time since August 2011.

In what signals tough times ahead, the IMF projects in its latest regional economic outlook for Sub-Saharan Africa that Kenya's forex-assets held on reserve by a central bank in foreign currencies-will be enough to cover only 3.9 months of the country's import needs by the end of this year, down from 4.4 months last year.

This is below the Central Bank of Kenya's (CBK) statutory requirement to maintain at least four months of import cover.

Should this come to pass, it will be an indictment on the CBK Governor Dr Patrick Njoroge, who made a name for himself protecting the shilling, with some analysts accusing him of propping up the local unit, claims he has vehemently denied.

The country's pot of foreign currencies has been declining, dropping below the desired 4.5 months import cover recommended by the East African Community (EAC) in July.

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IMF's grim forecast means that the country's problem of dollar shortage-which has been aggravated by the lingering effects of Ukraine, the lingering effects of the Covid-19 pandemic and the increase of interest rates in advanced economies-is likely to continue for the remainder of the year.

The country's forex, the IMF notes, will then improve in 2023, with the Washington-based institution projecting 4.2 months of import cover.

With too many shillings chasing too few dollars, the local currency has weakened considerably against the US currency. It was trading at an average of 121.1 against the greenback on Wednesday.

Official forex at CBK stood at a decade-low of $7.3 billion (4.11 months of import cover) as of October 13.

The drop in forex is despite the increased inflow of dollars from Kenyans living and working abroad even as export earnings from tea and coffee pick up following the lifting of the stringent measures by most governments to curb the spread of the Covid-19 pandemic.

CBK has 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.

"We have adequate reserves, but the [foreign exchange] markets need to improve in the way they are functioning. There was noise in the market as we came towards the electioneering period. That led to weaker performance of the market," said Dr Njoroge in a past press briefing.

Forex reserves have for a while remained above the statutory level of covering at least four months of imports.

IMF noted in the report that they averaged 4.3 months of imports of goods and services in the years between 2010 and 2018.

Reserves of foreign currencies and other assets such as gold rose to 6.2 months of import cover in 2019 before declining to 4.5 in 2020.

The country's reserves tend to rise sharply when the country receives loans such as the Eurobond and tends to drop when it pays back a loan.

Recently, Deputy President Rigathi Gachagua claimed CBK did not have enough foreign exchange reserves to be used by oil importers, forcing the regulator to fire back with a tutorial to the country's second in command on how the forex market works.

Although it is true that importers, including those of oil, were struggling to get dollars to buy this critical input, CBK insisted that as a regulator it is not an active player in the forex market.