Kenya’s dollar import cover sinks to a seven-year low amid a high inflation rate
Kenya’s dollar import reserves have sunk to undesired levels-a seven-year low amid a high inflation rate and high cost of living.
As a result of weaker foreign funding, a quicker increase in imports than exports, and a slowdown in remittances from Kenyans living abroad, Kenya’s import cover has fallen to its lowest levels in seven years.
According to the most recent Central Bank of Kenya data, the stockpile of foreign currency last Thursday was $7.32 million (Sh752.96 billion), down from the previous week’s level by $103 million (Sh12.45 billion).
At that level, the substantial dollar reserves, the smallest cushion since 4.10 months on October 22, 2015, may support the nation’s import requirements for 4.13 months.
Foreign exchange reserves are largely tapped for government payments such as servicing external debts and essential government imports such as medicines.
The reserves, the bulk of which are in US dollars, also serve as backup funds in unlikely emergencies such as the devaluation of the shilling, thus giving confidence to investors.
The CBK reportedly sold an undefined amount of dollars last week to reduce volatility in the shilling’s exchange rate, which on Friday averaged 120.85 units versus the US dollar, a decline of 6.81 percent since the year’s beginning.
Since July, Kenya’s import cover has gone below the targeted 4.5 months cushion advised by the seven-nation East African Community bloc, while it is still slightly above the statutory four months of import.
“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,” CBK Governor Patrick Njoroge told a press conference on September 30. “Now that all that has been resolved, we expect… continue to strengthen the market.”
Kenya abandoned plans to borrow at least $1 billion (Sh120 billion) from international capital markets — Eurobond — in the fiscal year ended June, hurting dollar inflows.
That was after interest demanded by international investors doubled to about 12 percent from 6.3 percent Kenya paid a year earlier for a similar amount.
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The inflows have further been hit by faster growth in imports than exports, while diaspora remittances have slowed in recent months.
For example, expenditure on imports bumped 25.96 percent year-on-year to nearly Sh1.25 trillion in the half-year period through June, higher growth than 17.31 percent in earnings from exports to Sh434.02 billion.
Remittances from Kenyans abroad, on the other hand, grew at a slower pace of 11. 44 percent to $2.67 billion (Sh322.49 billion) in the first eight months of the year compared with a growth of 19.21 percent a year earlier to $2.4 billion (Sh289.40 billion).
The forex markets were earlier in the year gripped by a mismatch between dollar demand and supply, with importers at the time saying they were paying higher than official exchange rates published by the CBK.
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