Kenya’s foreign exchange reserves have shrunk to the point of breaching the regional statutory threshold as diaspora remittances — the country’s key source of forex — dry up in the wake of the Covid-19 pandemic, putting the shilling under intense pressure.
Central Bank data shows that the country’s forex reserves haven fallen 13 per cent in the past four months to $7.74 billion (4.66 months of import cover) in April, down from $8.88 billion (5.4 months of import cover) in January.
In the past 12 months, the reserves have dropped by 24 per cent from a high of $10.12 billion (an equivalent of 6.4 months of import cover) in May 2019.
The East African Community convergence criteria requires 4.5 months of imports cover to provide an adequate buffer against short term shocks in the foreign exchange market
The Kenyan parliamentary Budget and Appropriation Committee has raised a red flag over the country’s dwindling forex reserves arguing it is leaving the economy exposed to both local and external shocks with increased pressure on the shilling exchange rate.
During January-April, shilling lost six per cent of its value to trade at record low of Ksh107.29 against the dollar on April 30, compared with Ksh101.6 against the greenback in January.
“Remember most of our forex comes from diaspora remittances and with the Covid-19 effects in Europe and the US, remittances also have fallen to an all-time low,” Kimani Ichung’wa, the committee’s chairman told The EastAfrican
“Exports also be it horticulture or tea and coffee are down. Tourism is literally dead therefore our reserves will definitely be knocked down. And recall you still have to import personal protective equipment and medical equipment to deal with the pandemic.”
According to the parliamentary budget office (PBO) the shilling is under pressure to depreciate due to reduced forex earnings mainly on account of reduced exports and declining diaspora remittances.
“Going forward, declining diaspora remittances pose a risk to the exchange rate,” says PBO through its newly released special Bulletin No. 1/2020 dubbed, The COVID 19 global pandemic: Impact to the economy and policy option.
Between January and February this year, remittances declined 16 per cent to $218.99 million from $259.39 million according to the central bank.
It is estimated that the country may face at least a 25 per cent decline in export revenue in light of the Covid-19 pandemic since many of the affected countries particularly in Europe are key trading partners of Kenya.
Declining global income implies reduced demand for Kenyan exports and with declining commodity prices, export earnings will fall significantly.
According to the PBO, a weaker shilling will make it more expensive for industries continuing with operations to source raw materials and intermediate goods, leading to cost push inflation.
Also, with the Covid-19 effects in Europe and the US, remittances also have fallen to an all-time low. During the period (January-April) the shilling lost six per cent of its value to trade at record low of Ksh107.29 against the dollar on April 30