- Kenya’s forex reserves dipped to $6.2 billion on May 19, an eight-year low, before a slight improvement to $6.4 billion on May 26.
- At $6.4 billion, Kenya’s reserves are just 3.60 months of import cover, which is below the Central Bank of Kenya’s desired target.
- What’s more, the reserves are below the East Africa Community preferred threshold of 4.5 months of import cover, hence exposing the country to high volatilities in the global market.
A dip in export earnings, coupled with reducing diaspora inflows at a time of huge debt repayments have left Kenya grappling with low forex reserves, raising concerns on the health of East Africa’s economic powerhouse.
The low forex reserves are further compounding the dollar shortage problem that has been gripping importers for months. Importers, mainly in the manufacturing and the energy sectors, have been struggling to secure the greenback to replenish their suppliers.
Kenya’s forex reserves dip to $6.2 billion
The latest data shows Kenya’s foreign exchange reserves dipped to $6.2 billion on week ending May 19, an eight-year low. They, however, posted a slight improvement to $6.4 billion on week ending May 26th.
At $6.4 billion, the country’s low forex reserves are just enough to provide 3.60 months of import cover. Unfortunately, this is below the Central Bank of Kenya’s desired target of four months of import cover. Further, the reserves are also below the East Africa Community preferred threshold of 4.5 months of import cover. Essentially, Kenya’s low forex reserves are exposing the country to high volatilities in the global market.
Diaspora remittances, which have been supporting the current account and the forex market, dropped in April, compounding the challenge of low forex reserves.
Kenyans living and working abroad sent home $320.3 million in April, compared to $357 million in March. The 10.5 percent decrease was attributable to high inflation in advanced economies including US, Kenya’s biggest source of dollars. According to the Central Bank of Kenya, the US accounts for 57 percent of total remittances.
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Across the US and other advanced economies, inflation remains high, pushing households to cut on expenditure. A significant number of Kenyans in the diaspora are now forced to look for extra sources of income to meet costs.
High inflation eroding diaspora dollars
According to digital remittances firm WorldRemit, over half (54 percent) of disapora workers have taken up a side hustle since Covid-19. WorldRemit survey said they ventured into side hustle to continue supporting their friends and family back home.
WorldRemit’s Cost of Living Index survey sought to understand how inflation crisis has affected the lives migrants workers. One in nine people worldwide relies on money sent from friends and relatives working abroad.
“Migrants’ resilience and commitment to their loved ones back home has proven to be vital, especially in a period where household expenses are increasing around the world,” said Jorge Godinez Reyes, Head of the Americas, WorldRemit.
Education, healthcare and household needs remain the main uses of remittances in Kenya, WorldRemit stated.
The high inflation in major economies is, however, expected to ease in the short-term. And this could see an increase in remittances. For instance, market sentiment have improved on the optimism about US debt ceiling. Further, the markets eased due to a decline in weekly jobless claims to 242,000 in the week ending May 13.
In addition, the Eurozone recorded a 0.1 growth in 2023 the three months to March. The US dollar index strengthened by 1.4 percent against a basket of major currencies during the week.
Currently, diaspora remittances are Kenya’s top forex earner since overtaking tea, coffee and tourism in 2017. The tourism sector, which used to be the second most forex earner tumbled under Covid-19. Kenya’s tourism revenues dropped by 80 percent in 2020 compared to 2019 when the country realised $1.17 billion.
Low forex reserves headache amid debt mount
The low forex reserves are presenting a headache for Kenya’s Central Bank in the wake of huge debt obligations. Loan repayments for the first nine months of the financial year ending June 30 overtook the recurrent expenditure as civil servants faced salary delays.
Kenya spent $5.9 billion on debt repayments between July 2022 and March, up from $5.4 billion in the same period previously. This marks the first time in Kenya’s history that debt costs surpassed recurrent expenditure, which stood at $5.8 billion. Kenya is facing a $67.9 billion debt mount, with the World Bank warning of debt crisis in developing countries.
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The country’s debut Eurobond, which is due in June 2024 sticks out like a sore thumb. Kenya is expected to pay over $2 billion to investors in a bullet payment to retire the 10-year sovereign bond issued in 2014. The mega financing marked the turning point when former President Uhuru Kenyatta sought commercial debt to plug budget deficit.
According to Treasury Principal Secretary Dr Chris Kiptoo, Kenya is expected to repay Eurobond debts of $1.84 billion in 2024, $826.7 million in 2027 and $918.54 million in 2028.
At a meeting with the National Assembly’s committee on public debt and privatization in March, Dr Kiptoo said the government will optimise the use of concessional external funding sources. It will also lengthen the maturity profile of public debt through issuance of medium to long-dated bonds. What’s more, policymakers will deepen the domestic debt market to finance budget deficits, he explained.
The National Treasury is also considering tapping more external concessional loans this year as it balances domestic and foreign borrowing, amid rising pressure on debt repayment, including Eurobond.
Kenya’s debt stock at $67.3 percent of GDP
Planned debt management operations to lower cost and risks have, however, not been fully implemented, Treasury said in its latest debt management report, pegging this to volatility in the global debt markets.
“The uncertainties created by the conflict in Eastern Europe led to disruptions of the key supply chains, triggering rise in prices particularly food and energy and tighter global financial conditions,” it said.
The increase in public debt stock in nominal terms was mainly attributed to new borrowing for budget support. The financing of ongoing and new development projects and exchange rate fluctuations also contributed.
Kenya is one of the heavily indebted countries with a debt stock at 67.3 percent of GDP. Nairobi’s debt costs are projected to hit $10.1 billion in the financial year ending June.
Meanwhile, the country is experiencing a tight dollar market since January. A weakening shilling has seen traders, mainly importers, spending more to ship in goods. Kenya remains a net importer with the country’s trade deficit widening to a new high last year.
According to the Economic Survey 2023, Kenya’s expenditure on imports rose by 17.5 per cent to $18.1 billion last year. In the period under focus, earnings from exports stood at $6.3 billion. This puts the trade deficit during the year at $ 11.7 billion, up from $10.1 billion in 2021.
A weakening shilling against major currencies
“Last year, increase in import expenditure was largely on account of continued increase in imports of petroleum products,” the Kenya National Bureau of Statistics indicates in the survey. Petroleum imports cost $4.3 billion, accounting for nearly a quarter of the total import bill in 2022.
KNBS said there was an increase in expenditure on imports especially due to rising global oil prices. And with a weakening shilling against major currencies, the country was forced to spend more.
“This resulted to a higher growth of imports as compared to total exports, widening the trade balance to a deficit,” KNBS says.
With the high import bill, traders have been scrambling for dollars to pay suppliers. This therefore shows that with low forex reserves the dollar shortage crisis in the markets is not about to go away.
The weak shilling is also forcing importers to spend more for same unit of goods. In the week ended May 26, the Kenya shilling closed at 138.25 to the dollar.
CBK can incentivise Foreign Direct Investments
With Kenya a net importer, dependence on dollar reserves from exports and diaspora remittances is proving unsustainable. “CBK can close the gap by incentivising foreign direct investments,” Market Analyst at FXPesa Rufas Kamau notes. The Central Bank could also consider increasing interest rates but that would trigger recession, hurt the economy further.
On the flip side, however, Kenya is enjoying strong support from the IMF and the World Bank. Loan disbursements in the short-term expected to support the forex reserves from a further dip, financial experts forecast.
The recovering tourism sector is also expected to support inflows this year. This as the government empowers the private sector to spur exports and therefore earnings.
This year, the Tourism Research Institute (TRI) has projected earnings from the sector will grow 35 percent to $2.6 billion. The upward trend in arrivals will see Kenya earn $2.9 billion next year from a projected 2.2 million international tourists. The number of expected holidaymakers this year is 1.99 million.
Plans underway to shore up tourism
The increase in tourists is, however, depended on how inflation ruffles key tourist source markets. Tough economic times in key source markets like the US could see potential travelers strike off their holiday plans.
“The projections were informed by global economic factors and Covid recovery patterns. The effects of the Russia invasion of Ukraine on some key markets and on global tourism supply channels was also taken on board,” TRI said.
Kenya Tourism Board, the country’s lead tourism sector marketing agency, is on an aggressive campaign in target markets to woo visitors. It is working with travel agents to place Kenya in the global map as a leading holiday destination, with beach and Safari as key products.
“We can set targets collaboratively and provide market development while they provide actual and real time bookings for tourists,” Tourism, Wildlife and Heritage Cabinet Secretary Peninah Malonza said.
The efforts by Kenya come as the travel and aviation industry continue to record a strong post-Covid pandemic performance. This was after the relaxation of the mobility restrictions in major business and leisure destinations worldwide.
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