Kenya Faces Its Biggest Forex Reserve Offset In Five Years Following The Deflation Of The Country’s Currency

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  • Kenyan forex reserve fails to reach an acceptable regional benchmark for the third week in a row. 

  • Kenyan shilling continues to steadily dip against the dollar reaching sh120.30/$1.

  • Standard of living for Kenyans may increase as the economy generally takes a hit.

The Kenyan shilling continues to decline in value, and as a result, a ripple effect is being felt throughout the country’s entire economy. One of the sectors affected by the currency’s recent devaluation is its forex reserves.

Following an endeavour this past Friday by the Central Bank of Kenya (CBK) to support its depreciating currency, the country’s forex reserve suffered a significant setback as it dipped down to its lowest levels in five years.

The Apex Bank released a data report that detailed an alarming Sh28 billion loss in the Kenyan forex reserve experienced this past week, dropping from $7.6 billion (Sh912 billion) to $7.37 (Sh884 billion), The Star reported. The last time the numbers were this low was in 2017.

 

The recent turn of events has created a bit of a dilemma in the country’s forex market. On the one hand, the usable forex reserve remains at a competent 4.2 months of import cover, and according to the CBK’s statutory requirement, this number seems to be sufficient.

“The usable foreign exchange reserves remained adequate at 4.2 months of import cover. “This meets the CBK’s statutory requirement to endeavour to maintain at least four months of import cover,” CBK said.

On the other hand, Kenya is in breach of East Africa’s FX reserve policy, where its country members are expected to have above 4.5 months of import cover at all times.

 

This currency decline has been a trend in the Kenyan economy for the past three weeks, prompting Apex Bank to use part of its stockpile to prevent the shilling from falling to a level that could prove detrimental to the financial market.

A decrease in local income and diaspora remittance is also becoming an issue of concern as the country’s GDP percentage widened to 5.1 per cent in April from 4.8 per cent a year earlier, owing to the higher cost of major imports such as fuel and food, amongst others, against the inflows of the country’s exports.

 

Data by the CBK shows diaspora remittances to Kenya last month totalled $319.4 million (Sh38 billion) compared to $336.7 million (Sh40 billion) in July last year, a 5.1 per cent drop. The inflows reported in July are the lowest since June last year, when the country received $306 million. Kenya’s debt increases by Sh40 billion anytime the shilling drops by a unit against the dollar.

As recently as Friday, the shilling against the dollar increased from sh120.05/$1 to sh120.30/$1, and in the previous week, the shilling was slightly lower at119.72/$1. It is estimated that the shilling has experienced a 6% drop in value against the dollar since the year began. But according to experts, the causes cited for this downward trend are both external and internal. 

 

Factors such as a prolonged election cycle, hikes in the federal rates in the US, and the Russia-Ukraine conflict, amongst others, have played a role in the country’s sluggishly declining economy.

It goes without saying that a hit to a country’s economy such as this will surely increase the standard of living within the said economy.

 

Source: Africa Business Insider

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