2 January 2018

East Africa: Dar, Nairobi Lead in Foreign Reserves in EAC

TANZANIA and Kenya have recorded high foreign exchange reserve that could cover almost 6.0 months of imports. The gross foreign reserves also comprise of projects and various other services from abroad.

According to the report released by Tanzania Minister for Finance and Planning, Dr Philip Mpango last week and the report released by Kenyan Central Bank (CBK) Governor, Dr Patrick Njoroge the two countries lead in foreign exchange reserve in the East African region.

Dr Mpango said Tanzania has a net foreign exchange reserve enough to cover 5.4 months of imports and services from abroad. The Minister said that the foreign exchange reserve at the central bank--Bank of Tanzania (BoT)-- amounts to 5.9bn US dollars. He said the government had not reserved such amount of foreign currency in the whole past 10 years. The Minister said in 2015, the government recorded a reserve of 4.09bn US dollars.

In Kenya, the CBK's foreign exchange reserves rose to an all time high in the period, due in part to plan external borrowings by the government. The CBK level of usable foreign exchange reserves stood at 8.3billion US dollars enough to cover 5.5 months of import at the end of last April compared with 7.7bn US dollars, (5.1 months of import cover) at the end of October 2016.

According to CBK governor, the reserves, together with the precautionary arrangements with the International Monetary Fund (IMF) continued to provide a buffer against short term shocks. Moreover, the July, 2017 data from the Ministry of Finance and Economic Planning of Rwanda shows the reserves were expected to slip from 1bn US dollar to 9.8bn US dollars, reducing the import cover to an average of 3.5 months in 2018.

The Bank was expected to draw down 10.9bn US dollars of its reserves in 2017, and business leaders expect this to put pressure on the exchange rate. In 2015/2016, when the reserves were under pressure due to falling exports, increasing imports and a dollar firming against the franc, most businesses registered a slowdown.

Commercial banks also took a hit from the worsening current account balance after recording a 70.5 per cent decrease in foreign assets. In absolute terms, the lenders' assets decreased by 39 million US dollars in the 12 months to December 2015.

"We should expect the Rwandan franc to be under pressureas demand builds up for foreign currencies," said Maurice Toroitich, Managing Director of KCB Rwanda. "This also means the reserves will not be deep enough to finance imports," Said the Rwanda Central Bank Governor, Mr John Rwangombwa.

However, Mr Rwangombwa assured that the reserve levels were strong and projects that they would cover four months of imports until the end of 2017. The reserves had been bolstered by the improving external balance of payments and growing domestic production.

In Uganda, the foreign exchange reserves decreased to 3.4bn US dollars in October from 3.5bn US dollars in September of 2017. Foreign exchange reserves in Uganda averaged 1.3bn US dollars from 1986 until 2017, reaching an alltime high of 3.5bn US dollars in September of 2017 and a record low of 5.10m US dollars in February of 1989.

The economists, have it that the most important advantage of a high level of foreign exchange reserves lies on political rather than economic curve. In most cases larger foreign reserve assists central banks to stabilise local currencies during crisis.

Also off late it has been observed by some people that reserves that can finance three months' worth of import bills, is adequate. The Greenspan- Guidotti rule is sometimes used as a benchmark in maintaining foreign exchange reserves.

The rule suggests that developing countries should maintain reserves equal to all external debts that are becoming due next year. The large foreign reserve also increases the confidence of meeting all external debt and obligations, which in turn improves sovereign debt rating, so a country can get new money at cheap rates.

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