Official foreign reserves at the Central Bank of Kenya have hit a new four-year high on new disbursements from the International Monetary Fund (IMF) and net dollar purchases by the apex bank.
Data from the CBK shows the forex cover rose by Sh95 billion to hit Sh1.204 trillion ($9.323 billion) as of Thursday last week from Sh1.109 trillion ($8.586 billion) the previous week.
The reserves now stand at their highest level since the opening week of October 2021, when the cover stood at Sh1.210 trillion ($9.365 trillion).
The growth in the CBK reserves is anchored on debt inflows from the IMF alongside net purchases by the apex bank. This has been attributable to increased foreign investment in the government’s domestic debt due to double-digit interest rates.
The IMF approved the disbursement of Sh78.3 billion ($606.1 million) to Kenya on October 30, covering the seventh and eighth reviews of its multi-year structural reform-based programme.
The disbursement has since been registered at CBK accounts, where it is held as foreign currency reserves and on-lent to the government in local currency on a need-basis.
The IMF inflows have complemented net dollar purchases by the CBK, which has leveraged increased foreign inflows to build up its reserve buffer.
CBK official reserves now meet its statutory requirement and the East African Community (EAC) convergence criteria of maintaining at least four months and 4.5 months of import cover, respectively.
“The usable foreign exchange reserves remained adequate at 4.8 months of import cover as of November 7. This meets the CBK’s statutory requirement to endeavour to maintain at least four months of import cover,” said the CBK last week.
The CBK reserves previously came under pressure, particularly in 2023, as the apex bank was forced to sell dollars from the cover to contain exchange rate volatility.
Reversal of exchange rate pressures in early 2024 has, however, allowed the CBK to rebuild the buffer by tapping increased inflows from foreigners buying into government domestic debt, rebounding exports, and growing diaspora remittances.
“The positive market confidence (from the settlement of the June 2024 Eurobond maturity) supported private external inflows into the local bond market. Against this backdrop and supported by a tight monetary policy stance, the shilling has strengthened markedly this year. This has facilitated substantial forex purchases to support reserves build-up by the CBK,” Kenya told the IMF in a letter undersigned by Treasury Cabinet secretary John Mbadi and CBK governor Kamau Thugge.
Foreign exchange reserves are held at the CBK as national assets and are used as a safety net to ensure the availability of foreign exchange to meet Kenya’s external obligations, including paying for imports and external debt service.
The reserves are also used for intervention when deemed necessary to smoothen ‘erratic’ movements of the exchange rates and CBK external payments.
The size of official reserves serves as a confidence signal to potential investors in the country and rating agencies.
The IMF has welcomed CBK’s action to stockpile dollars in its reserves amid the improved foreign inflows and exchange rate stability following the June 2024 Eurobond settlement.
“This aided an easing of sovereign spreads through the early second quarter of 2024, attracting sizable non-resident portfolio debt inflows, strengthening the shilling, and net forex purchases by the CBK. The CBK’s efforts at building forex reserves are welcome,” the IMF noted.
