By Ventures Africa
The fall in diaspora remittances that has caused depletion in foreign reserves is putting pressure on Kenya’s shilling.
Diaspora remittances, the country’s major source of foreign reserves, are troubled as global coronavirus pandemic defies proper management.
From $8.88 billion (5.4 months of import cover) in January, the government has seen forex reserves drop by 13 per cent to $7.74 billion (4.66 months of import cover) in April.
Over the past year, reserves have fallen 24 per cent from $10.12 billion, around 6.4 months of import cover in May 2019, according to data from the central bank.
Dwindling forex reserves leave the economy vulnerable to local and external shocks and put intense pressure on the shilling exchange rate, the parliamentary Budget and Appropriation Committee warns.
Between January and April, the local unit lost six per cent of its value, trading at a 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 manufacturers to source raw materials and intermediate goods for industrial production, resulting in cost-push inflation.
The plunge in reserves over the past four months also puts Kenya on the brink of breaching the convergence criteria of the East African Community – the regional statutory threshold requires 4.5 months of import cover.
The benchmark is meant to provide protection against temporary shocks in the foreign exchange market.
Kenya is being battered on all fronts by the pandemic which has blocked its major foreign currency earnings. Speaking on the depreciating shilling with The EastAfrican, committee chairman Kimani Ichung’wa cited a fall in exports amid the pandemic with many of Kenya’s trading partners, particularly in Europe, hugely affected.
“Tourism is literally dead therefore our reserves will definitely be knocked down,” he adds, “And recall you still have to import personal protective equipment and medical equipment to deal with the pandemic.”
But of all the factors, the decline in remittances remain the biggest threat to the shilling, according to Ichung’wa.
“Remember most of our forex comes from diaspora remittances and with the COVID-19 effects in Europe and the U.S., remittances also have fallen to an all-time low.”