Kenya’s foreign exchange (forex) reserves experienced a decline of nearly Sh50 billion in the final quarter of 2023, despite a surge in service exports, travel receipts, and diaspora remittances crucial for sustaining a healthy reserve level.

This underscores the ongoing struggle for the country in maintaining a surplus balance of payments (BOP), particularly in the realm of goods exports, which have either stagnated or exhibited sluggish growth, resulting in a relatively modest generation of foreign exchange.

As the fourth quarter of 2023 commenced, Kenya held usable reserves amounting to $6.913 billion (Sh1.09 trillion) as of October 6. However, by the close of December 29, the reserves had diminished to $6.612 billion (Sh1.04 trillion), reflecting a notable difference of approximately Sh50 billion during this period.

The dwindling reserves highlight the need for measures to bolster the country’s balance of payments, addressing challenges in goods exports and ensuring a sustained influx of foreign exchange.

The reserves currently cover just 3.6 months of import which sits lower than the required four months, with the Central Bank of Kenya (CBK) maintaining there is no cause for alarm even as the drops put the shillings at risk of further depreciation against major currencies.

“The usable foreign exchange reserves remained adequate at $6.775 billion (3.6 months of import cover) as of January 4. This meets the CBK’s statutory requirement to endeavor to maintain at least 4 months of import cover,” CBK stated in the last weekly bulletin.

Kenya’s forex reserves have been under pressure for the better part of 2023, driven primarily by rising external debt service costs amid weakening shilling and rising interest rates.

Instead, support from multilateral financiers such as the Word Bank, the International Monetary Fund (IMF), and other regional development institutions is what has majorly supported Kenya’s forex levels in recent months.

MPC decision for 2024

In 2024, the IMF sees the reserves rising modestly to an equivalent of just 3.5 months of import cover and 3.7 months in 2025, pointing to a continuation of the shilling freefall against the dollar this year.

The shilling closed last week at an official exchange rate of Sh157 per dollar, and the depreciation concern is likely to be the centrepiece of CBK’s monetary policy decision across 2024.

The reserves, which act as capital reserves for the country and are used to meet external financial obligations, surprisingly declined during a period of festivity that is often associated with high money circulation globally.

Strong recovery in the global tourism sector in the post-COVID pandemic period has seen Kenya post a strong performance, with the tourist arrivals increasing to 1.7 million by October 2023.

CBK data also shows diaspora remittances continued to grow last year, hitting $3.462 billion (Sh543.5 billion) in the first ten months ending October 2023.

“Diaspora remittances continue to be quite strong. For the year (2023) as a whole, we expect that a 4.1 percent increase (in diaspora remittance by October) will be sustained,” CBK governor Kamau Thugge said in the post-monetary policy committee briefing in December 2023.

With diaspora remittances growing to become Kenya’s largest foreign exchange earner, the Kenya Kwanza administration has been seeking to leverage its citizens abroad for cheaper foreign-currency-denominated finance while also trying to open its borders to more tourists.

In his speech during Kenya’s 60th Jamhuri Day Celebration, President William Ruto announced plans to adopt a visa-free policy and replace it with Electronic Travel Authorization (ETA) starting January 2024 to attract more visitors and revenues.

“On average, each visitor spends around Sh500,000 within three months in Kenya. We believe we can grow the annual revenue from increased tourism to Sh5 trillion every year,” Immigration Principal Secretary (PS) Julius Bitok said on Friday last week when he received the first batch of arrivals through ETA.