Kenya’s forex reserves have dropped as the National Treasury disburses billions of shillings to service growing external debts.
This could potentially weaken the shilling’s value in the coming months, making debt repayment more expensive.
As of last week, forex reserves had decreased by $112 million to $6.955 billion.
The current reserve is equivalent to just 3.76 months of import cover, falling short of the statutory requirement of at least four months of cover.
The International Monetary Fund, which disbursed $415.4 million to Kenya in July, expects Kenya’s official foreign exchange reserves to remain under pressure.
This situation raises concerns about the ability to control the local currency’s value and difficulties in generating foreign exchange.
In addition, NCBA Market Analysts note that since the end of the last fiscal cycle (FY 2022/23), short-term rates have risen by an average of 312.2 basis points.
As a result, domestic interest payments are projected to rise by KES 18.1 billion to KES 646.4 billion.
The currency depreciation and interest rate movement on USD loans has led to an upward revision of foreign debt service from KES 65.1 billion to KES 272.5 billion.
Consequently, the government’s projected recurrent expenditure for FY 2023/24 has been revised upwards by a total of KES 85.0 billion, with 97.2% of that allocated for debt interest payments, increasing by KES 83.2 billion.
This has resulted in an increase in the proportion of the government’s budgeted expenditure allocated to debt interest payments from 22% to 25%, rising to KES 918.9 billion.
To finance this deficit, the sovereign has revised its net domestic borrowing target for the fiscal year 2023/24 upwards by KES 98.4 billion from KES 316.9 billion to KES 415.3 billion.
“Overall this will sustain the upward pressure on the short-term interest rates owing to investors’ preference for investments on the shorter end of the curve,” says NCBA.
In August, the shilling lost 2.3% of its value against the US dollar. The Central Bank of Kenya’s (CBK) official foreign exchange reserves decreased by USD 250 million during the month, amounting to USD 7.08 billion.
“Certainly, the central bank has limited headroom to offer any support to the currency,” Said NCBA in its August
“In the interim, however, the shilling will remain subject to supply and demand forces, whose mismatch remains protracted.”