Kenya’s shilling is under pressure due to rapidly depleting foreign reserves, mainly triggered by a fall in diaspora transfers, the country’s largest source of foreign currency, in the wake of the coronavirus pandemic.
From $ 8.88 billion (5.4 months of import coverage) in January, the government has seen foreign exchange reserves fall by 13 percent to $ 7.74 billion (4.66 months of import coverage) in April. Over the last year, reserves have dropped 24 percent from $ 10.12 billion, about $ 1 billion. 6.4 months of import coverage in May 2019, according to data from the central bank.
The dwindling currency reserve leaves the economy vulnerable to local and external shocks and puts intense pressure on the shilling exchange rate, warns Parliament’s Budget and Appropriations Committee. Between January and April, the local unit lost six percent of its value and traded with one record low of Ksh107.29 per dollar on April 30 from Ksh101.6 in January.
According to the Parliamentary Budget Office, a weaker shilling will make it more expensive for producers to buy raw materials and intermediates for industrial production, resulting in a cost-pushing inflation.
The dive into the reserves over the last four months also puts Kenya on the brink of violating the East African community’s convergence criteria – the regional statutory threshold requires 4.5 months of import coverage. The benchmark is intended to provide protection against temporary shocks in the foreign exchange market.
Kenya is being beaten on all fronts by the pandemic that has blocked its largest foreign currency earnings. Talking about the deteriorating shilling with The EastAfrican, committee chairman Kimani Ichung “cited a decline in exports amid the pandemic of many of Kenya’s trading partners, especially in Europe, which was hugely affected.
“Tourism is literally dead, which is why our reserves will certainly be depleted,” he adds, “and remember that you still need to import personal protective equipment and medical equipment to deal with the pandemic.”
But of all factors, the drop in transfers remains the biggest threat to shilling, according to Ichung’wa. “Remember, most of our forex comes from diaspora transfers, and with the COVID-19 effects in Europe and the United States, transfers have also fallen to a low time.” In a recently published bulletin, PBO notes that in-depth diaspora transfers “pose a risk to the exchange rate” in the future.
In the midst of the pandemic, many countries are also facing a similar challenge in sub-Saharan Africa, with migrant transfers accounting for a significant portion of the forex influx. The World Bank predicts a decrease of 23.1 percent in remittance flows to the region this year – $ 37 billion from $ 48 billion last year – because of the COVID-19 crisis. Moreover, the decline is a global trend, with the world expected to see the “sharpest decline in transfers in recent history.”