The International Monetary Fund (IMF) predicts that Kenya’s official foreign exchange reserves will continue to face challenges despite recent inflows, including the disbursement of Sh58.8 billion from the multilateral lender. The IMF’s projection for gross international reserves in months of import cover remains largely unchanged, with the buffer expected to reach an equivalent of 3.3 months of import cover by the end of 2023.
The projection indicates an improvement from the estimate of three months of imports cover reported in December last year. However, the IMF expects the reserves to rise only slightly to 3.5, 3.7, and 3.8 months of import cover in 2024, 2025, and 2026, respectively. This projection falls below the Central Bank of Kenya’s (CBK) statutory requirement to maintain no less than four months of import cover, indicating pressure on the reserves throughout 2023.
The CBK’s data shows that usable foreign exchange reserves as of July 13 stood at Sh1.058 trillion ($7.481 billion), equivalent to 4.09 months of import cover. Kenya’s forex reserves have been under pressure due to rising external debt service costs over the past year.
The reserves held at the CBK serve as national assets and act as a safeguard to meet the country’s external obligations, including imports and external debt service. The primary objective in managing reserves is typically capital preservation.
In November, the reserves fell below the four-month import cover for the first time since 2015, signaling increased risks of difficulties in managing external shocks. By mid-February, forex reserves reached a decade low of 3.8 months of import cover due to rising debt repayments to bilateral and commercial lenders, raising concerns about the country’s currency control and forex generation capability.
CBK Governor Kamau Thugge expressed optimism that new external financing and an improving balance of payments would help maintain foreign reserves above the required levels, expecting a surplus in the balance of payments and an improvement in the current account deficit.
Opinion:
Kenya’s foreign exchange reserves have faced challenges amid rising external debt service costs, putting pressure on its ability to manage external shocks and meet its obligations. The IMF’s projection of reserves below the CBK’s statutory requirement highlights the need for effective measures to stabilize and strengthen forex reserves. It is essential for the country to focus on improving its balance of payments and attracting external financing to ensure a sustainable level of foreign exchange reserves. Additionally, promoting economic growth and export competitiveness will play a crucial role in enhancing forex generation capability and mitigating risks associated with reserve fluctuations. As Kenya navigates these challenges, maintaining a prudent monetary and fiscal policy framework will be vital to safeguard the country’s financial stability and economic resilience.