Central Bank’s foreign exchange reserves drop by Sh15bn in two weeks

The foreign exchange reserves kept by the Central Bank of Kenya (CBK) have fallen by more than Sh15 billion ($151 million) in two weeks.

Analysts have observed that since last week CBK has been out of the forex market in terms of injections due to reduced dollar demand as the year comes to an end, meaning the fall in the reserves may be a result of the government spending on the recent syndicated loan from global banks.

The CBK weekly update on the local financial markets shows as at November 19 the reserves stood at Sh690.8 billion against Sh706.2 billion on November 5.

The current level of forex reserves can finance 4.3 months of imports compared to 4.4 months two weeks ago when the total stood at Sh706.2 billion ($6.905 billion).

This is above the minimum level of four months of import cover as stipulated in the law.

Analysts say the level is sufficient given that Kenya also has a line of forex-denominated credit from the International Monetary Fund to the tune of Sh65 billion.

“The CBK noted that the reserves, together with SDR (special drawing rights) agreement with the International Monetary Fund, would provide sufficient buffer against unexpected economic shocks,” said Cytonn Investments.

As a result of the syndicated loan there has been an overall increase in reserves compared to early October when they stood at an equivalent of 3.9 months of imports — below the statutory four months.

Cytonn Investments noted the CBK had taken aantage of the strengthening of the local unit in recent weeks to buy dollars from the market even as it benefited from the forex-denominated syndicated loan.

“Foreign exchange reserves are currently at 4.3 months of import cover from 3.9 months at the close of September due to CBK’s purchases of foreign exchange from the market and receipts of proceeds from the government’s syndicated loan,” said Cytonn.

Recently, Kenya received Sh61 billion — in a Sh77 billion ($750 million) syndicated loan — as a first tranche from three international banks including StanChart Plc, Citigroup and Standard Bank to alleviate a financial crunch that began to bite a few weeks ago.

One of the objectives of the foreign loan was to ensure that pressure on interest rates came down as it was obtained at about 5.8 per cent yield compared to the local short-term rates then running at over 20 per cent.

The rate on government paper has since declined considerably with the 91-day Treasury bill at 9.6 per cent during the auction at the end of last week.

The 182- and 364-day government securities have also seen their rates fall to 10.2 and 12.1 per cent respectively as at the latest auction. As a result some of the banks have abandoned their earlier intention to increase lending rates.