Dollar reserves shrink on debt repayment, borrowing reduced

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Capital markets

Dollar reserves shrink on debt repayment, borrowing reduced


Kenya’s foreign exchange reserves fell by 44 billion shillings ($365 million) in August to 886 billion shillings ($7.38 billion) on debt repayments. FILE PHOTO | NMG

Kenya’s foreign exchange reserves fell by 44 billion shillings ($365 million) in August to 886 billion shillings ($7.38 billion) on debt repayments to bilateral and commercial lenders, approaching the minimum cover of four months of imports.

Kenya paid $110 million (13.2 billion shillings) to the Trade and Development Bank (TDB) in principal and interest on the syndicated loans, while semi-annual interest payments for the Eurobond of 2 billion dollars (240 billion shillings) issued in February 2018 consumed an additional 9 shillings. $0.3 billion ($77.5 million).

Interest and principal payments to the World Bank’s International Development Association (IDA) – which largely provides concessional loans to the world’s poorest developing countries – amounted to $5.9 billion. shillings ($49.4 million) during the month.

Kenya’s reserves have been steadily declining for months due to reduced external borrowing due to high interest rates and a drop in remittances from the diaspora.

The CBK has normally replenished its dollar stack from the proceeds of external government loans, which it buys from the Treasury in exchange for shillings to be deployed in the domestic economy.

Reserves, which have already fallen below the East African Community (EAC) preferred threshold of 4.5 months of import cover, are now approaching the country’s set minimum of four months of cover , highlighting the balance of payments challenges that await us if there were no through external lending or domestic purchases.

“Usable foreign exchange reserves remained adequate at $7,375 million (4.2 months of import cover) as of September 1,” the CBK said in its weekly market bulletin released last Friday.

In addition to debt repayments on behalf of the Treasury, the CBK also deploys the reserves to make payments for government purchases abroad and also conducts open market sales to banks when seeking to stem rate volatility. change.

There is also the backdrop of high demand for the greenback from importers, which has seen the shilling fall to historic lows of 120.20 units against the dollar in the forex market.

Kenya is a net importer of intermediate goods and raw materials for industrial use in the manufacture of basic household items, cooking oil, which means that foreign exchange costs are passed on to locally produced goods.

The country also spends billions importing a wide variety of goods, including petroleum products, wheat, second-hand clothes, motor vehicles, vegetable oils and industrial machinery, the costs of which rise as the shilling rises. weakens against the dollar.

Difficulties encountered by the government in accessing external loans due to interest rate problems also weighed on reserves. The country recently canceled a billion-dollar Eurobond issue and abandoned plans to raise a similar amount through a syndicated loan due to high interest charged in the international market.

Diaspora remittances from the United States have also fallen by an average of 3% per month this year, reflecting the high cost of living in the world’s largest economy, which has reduced the disposable income of Kenyans for provide for the needs of their relatives back home.

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