After three months of relative improvement, Kenya’s forex reserves have again started a downward spiral as the National Treasury coughed billions of shillings in July to service burgeoning external debts.

This signals more dent to the shilling’s value in coming months, with the official exchange rate already threatening to cross the Sh150 mark against the dollar, which will make debt repayment even costlier.

By last week Friday, foreign exchange (FX) reserves went down by $112 million (Sh16.46 billion) to $6.955 billion (Sh1.022 trillion) from the previous week’s levels of $7.067 billion (Sh1.038 trillion).

The current reserve is equivalent to just 3.76 months of import cover instead of the statutory requirement of at least four months of cover. Meanwhile, the shilling weakened further to exchange at Sh146 per dollar, according to the Central Bank of Kenya (CBK), but black market players are quoting more.

“The Kenya Shilling remained relatively stable against major international and regional currencies during the week ending September 14. It exchanged at Sh146.66 per US dollar on September 14, compared to Sh146.04 per US dollar on September 7,” CBK stated in the weekly bulletin.
Currency value

However, the plunge in the reserves still raises concerns regarding the ability to control the dips in local currency value, with analysts expressing fears over difficulties in generating forex.

The International Monetary Fund (IMF), which disbursed $415.4 million (now worth Sh61.06 billion) to Kenya in July, expects Kenya’s official foreign exchange reserves to remain under pressure.

IMF sees the reserves rising modestly to an equivalent of just 3.5 months of import cover in 2024 and 3.7 months in 2025, pointing to a possible deterioration of the reserves as the year closes. Since last June, the FX figures have been improving, supported mainly by fresh loan inflow from multilateral lenders, diaspora remittances, and a marginal decline in import value. This benefit has since been washed away as the

Treasury paid off major debts when the current 2023/24 financial year (FY) commenced in July.
Gazetted data on inflows and outflows from the government’s main account shows that the Treasury spent nearly Sh161.8 billion on debt repayments in both interest principle amounts in July, meaning without such payments, the dollar reserves would have been cushioned.

The payment was partly on account of increased repayment to the Exim Bank of China, which tops the debt burden after financing Standard Gauge Railway (SGR) and other projects in Kenya in the past decade. Controller of Budget (CoB) Margaret Nyakang’o last week warned that the depreciation of the shilling would have a huge cost impact on the amount of money required to offset the maturing debt, signaling tougher times.

Economic agenda

The warning further implies implementation of key projects under President William Ruto’s economic agenda could be impacted, especially should the administration consider readjusting the budget.
“CoB recommends a special audit of existing and committed loans to link the loans with the projects funded through borrowed money,” said Nyakang’o.