The dwindling forex reserves in Kenya have sparked concerns about currency stability and the ability to meet external obligations, prompting a closer examination of the impact on the overall economy. With a depreciation risk looming and import costs on the rise, the implications of Kenya’s declining forex reserves are felt by businesses, consumers, and policymakers alike.
Kenya Forex Reserve
Kenya is grappling with a sharp decline in its forex reserves, triggered by the plummeting value of the shilling. Forex reserves in Kenya refer to the foreign assets managed by the central bank, encompassing various foreign assets like gold, specific currencies, special drawing rights, and marketable securities in foreign denominations such as treasury bills, government bonds, corporate bonds, equities, and foreign currency loans.
Fitch Ratings warns that this decline highlights the mounting strain on external liquidity. Kenya’s official foreign-exchange reserves have hit their lowest point since 2015, standing at just USD6.6 billion, equivalent to a mere 3.66 months of imports. Kenya’s access to international capital markets remains restricted due to its persistent fiscal and external deficits, dollar scarcity, high debt levels, deteriorating external liquidity, and the considerable costs associated with external financing. The government faces substantial external debt-service obligations of USD 3 billion in 2023.
Implications of Dollar Scarcity on Kenya’s Economy
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The scarcity of dollars presents significant macroeconomic and political risks, as it exerts pressure on the currency and contributes to inflation, which has averaged 9.1% year-on-year during the first two months of 2023. This scarcity also has the potential to act as a drag on economic growth. It influences a range of economic indicators that are closely monitored in the economic data calendar. The economic calendar shows global events and updates that serve as economic indicators.
If the reserves of dollars remain low and hinder the authorities’ ability to effectively manage currency depreciation, there is a risk of a sudden and steep weakening, exacerbating inflation and social instability. These adverse effects could have a detrimental impact on economic growth and potentially affect the country’s rating.
The dollar shortage can be attributed to various factors, including declining exports, high import bills, and reduced remittances, leading some firms to seek foreign currency in neighboring Tanzania. Importers face the highest demand for dollars, which is compounded by the increased exchange rates of the US currency and the emergence of a black market for dollars. While the Central Bank of Kenya (CBK) sets the official exchange rate at 127.80, the black market rate can reach as high as 139. The Kenya Association of Manufacturers (KAM) has highlighted that many manufacturers and processors are now facing a scarcity of dollars in commercial banks, which they rely on for sourcing raw materials from foreign markets. This scarcity severely hampers their ability to conduct business effectively.
The Impact of Kenya Forex Reserve Decline
Kenya’s economy is currently facing a severe shortage of foreign exchange reserves, leading to significant challenges for consumers and revealing underlying structural issues that may take time to resolve. One of the notable consequences of this shortage is the emergence of fuel shortages, particularly in Nairobi and other major areas of the country. The decline in Kenya’s foreign exchange reserves is being held responsible for the ongoing crunch experienced by Kenyan consumers. Traders and motorists are among the first to bear the brunt, as some filling stations in Nairobi have run out of petrol and diesel. The shortage of foreign exchange directly affects fuel supplies and, consequently, the country’s supply chain, with broader implications seen in the scarcity of essential imports like medicine and food. The insufficient availability of hard currency has hindered both major and small-scale traders from importing goods.
The reduced forex reserves have caused a substantial increase in the exchange rate, resulting in the Kenyan shilling facing intense pressure against other major currencies. This situation highlights the pressing nature of Kenya’s declining forex reserves, which have reached their lowest level in eight years.