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Kenya: Forex Reserves Shoot Up to Sh215 Billion
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Business Daily (Nairobi)
8 July 2008
Posted to the web 9 July 2008
Washington Gikunju
Nairobi
The country's official foreign exchange reserves have risen to $3.3 billion (about Sh215 billion) in June from $3.2 billion in May, signalling a halt to a steady erosion of the country's import cover reserves since January, this year.
Import cover reserves, which refer to the amount of foreign currency available at Central Bank (CBK) for import bill payments, increased from an equivalent of 4.55 months cover as at the end of May to 4.60 months in June.
Import cover
The figures are contained in the latest issue of CBK's weekly bulletin dated July 4.
CBK wants to maintain an equivalent of foreign currency reserves to cover at least 4.50 months of import cover, while the regional economic trading bloc, East African Community (EAC), recommends that respective central banks maintain foreign currency reserves that cover an equivalent of at least six months of import bills.
Import cover reserves are economically important to the country given that Kenya is a net importer of capital goods and crude oil, with the total import bill soaring to Sh605 billion last year, up from Sh521 billion in 2006 as per the 2008 Government economic survey report.
The foreign currency reserves at CBK had declined by a total of $146 million (Sh9.5 billion) since January, falling from an equivalent of 4.93 months of import cover to 4.55 months as at the end of May.
The increase is the first month-on-month rise since January.
The economically disruptive post-election stalemate at the beginning of the year fuelled fears that the country would suffer from an import bill crisis as the political stand-off away tourists and disrupted activity in agriculture rich areas, cutting down foreign currency inflows at the time to a trickle.
Economic researchers at Standard Bank of South Africa warned then that lost tourism earnings, delayed tea and coffee auctions and the disruption of regional trade were likely to adversely affect Kenya's trade balance, at least in the short term.
"Kenya's largest generators of foreign exchange have been affected by the current political turmoil which implies that the country's foreign reserve stocks have not expanded at pre-election rates," said Ms Yvonne Mhango, an economist at the Standard Group's Africa research desk in January.
Tourism, tea, coffee and horticulture which are major foreign exchange earners were affected by the January political crisis.
Exports from the three sectors earned the country approximately Sh168 billion last year, but are expected to decline sharply this year following the displacement of farmers in the Rift Valley province as a result of the political crisis.
The amount of foreign currency reserves is also a function of direct remittances to CBK that comes from sources such as sale of Government assets, remittances from the diaspora and the prevailing level of exchange rate of the shilling to the dollar.
The source of the increase in foreign currency is not yet clear but Alex Ngaine, a fixed income dealer at CFC Stanbic Bank, says the just concluded sale of a 25 per cent stake in Safaricom could have contributed to the increase in forex reserves.
"Some of the payments by foreign investors could have been submitted in foreign currency," says Mr Ngaine.
Resa Imbuye, an Equity analyst at Old Mutual Asset Management, says a shift towards the EAC recommended import cover target of six months would be more desirable, but other considerations such as inflation and the shilling's exchange rate influence CBK's decision on the issue.
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"A steep build up of dollars would require CBK to mop them up from the market, which would subsequently increase liquidity and accelerating inflation, while at the same time affecting the exchange rate of the shilling. It is a delicate balancing act," says Mr Imbuye.
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