Foreign exchange reserves fall under pressure from debt repayment

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Currencies

Foreign exchange reserves fall under pressure from debt repayment


Central Bank of Kenya. FILE PHOTO | NMG

Kenya’s official foreign exchange reserves fell to 941.5 billion shillings ($7.953 billion) in the week ended July 14, with import cover falling to the lowest level in a year at 4.59 months .

Reserves fell by 102.3 billion shillings from the week ended December 30, when they were recorded at 1,040 billion shillings ($8.817 billion), representing an import cover of 5. 39 months.

Analysts attributed the decline to external debt repayments, which remain the main source of outflows, including the Eurobond coupon repayment made in June.

External debt service in May and June was 29.6 billion shillings and 31.1 billion shillings respectively according to the World Bank’s debtor reporting system.

The Central Bank of Kenya (CBK) said in a bulletin that reserves were adequate and above its threshold of at least four months of import cover, and the EAC region’s convergence criterion of 4.5 months. .

The banking sector regulator, as the custodian of the country’s official foreign exchange reserves, typically uses the hard currency to make external payments such as servicing foreign loans on behalf of the government or paying state suppliers.

The regulator can also sell dollars in the market to avoid volatility when the shilling weakens, or buy hard currencies when volatility is on a strengthening bias.

The depletion of government dollar reserves also coincides with the depreciation of the shilling.

Analysts, however, said the CBK has not sold dollars in recent years to dampen exchange rate volatility.

The local currency has been under pressure since the beginning of this year, losing 4.2% against the dollar amid the conflict between Russia and Ukraine.

An International Monetary Fund loan of 27.89 billion shillings ($235.6 million) approved on Jan. 18 for fiscal support is expected to boost reserves in coming weeks.

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