CBK is depleting foreign currency reserves to stabilize the shilling
Kenya’s foreign currency reserves has declined from shs 694 billion reported last week to shs 688 billion this week. The reserves depletes when CBK sells the foreign currency to the market to strengthen the Kenya shillings against the dollar or when foreign debts are being repaid. In the past weeks, the Kenya shillings has been stabilizing against the dollar at around shs 102 per dollar, which can now be explained by the declining foreign currency reserves.
Foreign currency reserves is an important shock absorber against macroeconomic turbulence that may come from natural phenomenon like the ongoing El-Nino rains, recession in major world economies, and decline in the performance of foreign exchange earners such as tourism industry that hit a low from April this year due to attacks by terrorists.
If the government continues to sell the foreign currency reserves then it is likely the reserves will drop to below the legally prescribed limit of four months worth of imports. In September, the reserves had dropped to shs 642.6 billion; a 3.98 months worth of imports.
In the month of December, short term debts amounting to shs 67 billion that includes Eurobond interest of shs 9 billion will mature and this will put more pressure on the foreign currency reserves when the government repays the debts.
The repayment of the debts both in December and January 2016 will not only affect the foreign currency reserves but, as experts predict, the interest rates will also have to rise again; stemming from the fact that the government will need to borrow heavily from the domestic market to fund its deficit. Already a shs 20 billion five year bond has been issued that will begin to mature in early 2016. As of today, government debt due in January 2016 is already at shs 86 billion.
But it is not all gloomy. The Ministry of Tourism in partnership with major banks is planning a series of high profile International events to be held in Nairobi geared towards revamping the stagnant tourism industry. When and if the tourism sector picks up, then the foreign currency reserves should roll back to comfort as Kenya shillings naturally stabilizes. The interest rates should also lower to levels that encourage increased consumer spending. These positive outlooks will however be realized way past January given that January is always a slow month after heavy spending in December.
