Kenya: Decline of FX reserves rattles importers

By Herald Aloo
Posted on Tuesday, 7 June 2022 12:05

Kenya Central Bank Governor Patrick Njoroge addresses a news conference at the Central Bank of Kenya headquarters in Nairobi
Kenya Central Bank Governor Patrick Njoroge addresses a news conference at the Central Bank of Kenya (CBK) headquarters in Nairobi, Kenya July 25, 2019. REUTERS/Stringer

The gradual decline of foreign exchange (FX) reserves in Kenya is fuelling the black market and causing additional financial pain for manufacturers and importers.

Kenya’s dollar stock has plunged by 15% to $8.17m as of 26 May, from $9.62m held in September 2021.

Although the CBK insists that the available dollar stock is enough to cover 4.86 months of imports, it is only marginally above the statutory requirement of at least 4 months, as well as the East African Community (EAC) region’s convergence criteria of 4.5 months import cover.

“There are sufficient dollar reserves which we are using for payment of services,” CBK Governor Patrick Njoroge tells The Africa Report.

“We have a projection running two years from now and can even go further for robust planning. We are quite comfortable about the levels we have on a monthly or weekly basis,” he says.

With the marginal difference, the central lender is walking a tightrope – trying to rein in runaway inflation while simultaneously tightening monetary policy.

Meanwhile, businesses are rattled by the forex scarcity, which has strained their supply calendars amid heightened competition for raw materials in the overseas market. This has been intensified by strong demand in the post-lockdown economic activity and continued global supply chain disruptions.

Sourcing FX

Local manufacturers tell The Africa Report that sourcing hard currency has become incredibly difficult as some banks have put caps on dollar requests. In turn, consumers –  with their squeezed salaries – pay for inflated production costs and imports.

Importers are now forced to make prior currency exchange arrangements to at least forge ahead with consistent supply, but there is still no guarantee.

Rajul Malde, CEO and commercial director at Pwani Oil, says nearly all the banks they use, including Citibank, Ecobank, NCBA, Diamond Trust Bank (DTB), and Equity, have placed dollar exchange limits between $20,000 and $50,000, depending on the availability.

We could see the worst in the coming days

“Various banks have different limits with no consistency. You cannot get [dollars] every day. Banks say there is not enough inflow of dollars, and limits are based on what they are getting,” he says.

Pwani Oil Ltd has now been forced to temporarily shut down their plant over challenges in acquiring raw materials due to shortage of dollars to settle payment on time.

The oil maker, which is also battling raw material supply shortages after Indonesia banned palm oil exports, requires between $1m and $1.5m to complete a single importation phase.

“The CBK published rates are non-existent. There is a parallel market [is emerging],” he says.

Small scale importers in the country are the hardest hit by the scarcity, with banks limiting them to only $1500 to $2000 daily, way below the amount of forex needed to seal import deals.

“We are forced to make prior arrangements at the bank to access dollars or seek alternative means through forex exchange intermediaries where there are no limits,” says an importer of household items who did not want to be mentioned for fear of being confronted by dealers from the forex market.

The importer requires more than $30,000 every month to settle overseas payments. “We could see the worst in the coming days.”

Small to medium sized enterprises (SMEs) – many of which are small scale importers – contribute about 30% of Kenya’s jobs annually and make up for roughly 3% of GDP. With the forex exchange bottlenecks, the informal economy may experience huge setbacks.

Dollar scarcity

Analysts partly blame dollar scarcity on exporters themselves. Exporters are the main source of dollars into the financial system, but remain hesitant to release FX into the market at the official exchange rate, anticipating further weakening of the shilling.

“It is a matter of self-interest. [As] long as [importers] are willing to let go of the dollars, we are safe. Otherwise, the [shilling exchange] rate and [dollar] shortage will continue to fall,” says Mihir Dhakar, an economist. “But the way the exporters are feeling… they might not be willing to let dollars go.”

The limit could be an indirect way or a silent condition to cool off the high dollar demand and avoid further weakening of the shilling

Kenya operates a liberalised foreign exchange market, which according to Mihir, cannot be controlled by the central bank per the current forex rules. This implies that the central bank cannot forcefully purchase dollar proceeds earned by exporters and inward remittances.

Exporters are therefore at liberty to sell dollars, allowing those with dollar-based accounts to stock up on FX while importers battle scarcity.

“The CBK does not want to see any of the banks selling excessively,” says Ken Gichinga, chief economist at Mentoria Economists. “The limit could be an indirect way or a silent condition to cool off the high dollar demand and avoid further weakening of the shilling.”

CBK data shows that the value of foreign currency deposits in local banks hit an all-time high of KSh804bn in February 2022 compared to KSh793bn witnessed in January 2022. This was mainly supported by gradual rise of exports, record-high remittances and tourism receipts.

Overall exports stood at about KSh604bn in 2021, up from KSh512.3bn in 2020, according to the latest data by Kenya National Bureau of Statistics (KNBS).

Despite the increase in exports, the value is not enough to offset the amount of dollars required to meet the country’s huge level of imports, underscoring the country’s growing trade deficit that is partly contributing to the dollar scarcity.

The country’s trade deficit widened to KSh1.24tn in 2021 as the import bill jumped to KSh1.9tn from KSh1.4tn in the previous year, attributable to high imports on industrial supplies, fuel and lubricants, machinery, transport equipment and consumer goods.

Parallel exchange rate

The Kenya Association of Manufacturers (KAM), an industry lobby, has petitioned the central bank to make dollars better available, arguing that the situation has triggered a parallel exchange rate which has seen manufacturers buying a dollar at KSh122, above the printed official rate of Sh116.

“Banks are unable to trade dollars between themselves either, further exacerbating supply constraints,” says Mucai Kunyiha, chairman, KAM. “The risk here is that we are creating a parallel shadow market with unwanted consequences.”

The association reckons that the foreign exchange market is seemingly losing confidence, and in extreme cases, supplies have been cut or delayed as importers breach credit limits due to limited dollars.

Some global suppliers now demand expensive Letters of Credit to transact, resulting in an increase in the working capital, according to the lobby group.

However, in a rejoinder, the CBK refuted the lobby’s claim of a parallel market and dollar scarcity, arguing that the contribution of manufacturers to the forex market is negligible, and nowhere close to $2bn generated and distributed monthly.

“They [manufacturers] should understand that they are small in that sense and sort of go to the market like everyone else. There are no favourites in the market,” the CBK governor says.

Manufacturers are amongst the leading importers in Kenya due to the huge volume of raw materials required. Official data from CBK shows that raw materials imported in 2021 hit KSh399.6bn. At the same time, machinery and transportation equipment imports were valued at KSh512.5bn.


Kenya’s inflation rate has been on a steady upward trajectory, hitting a two-year high of 7.1% by the end of May. This is just 0.4% shy of the upper bound of 7.5% inflation rate recommended by the CBK.

According to KNBS, the rise in inflation is due to notable spikes in the prices of food items. A litre of cooking oil, for instance, has increased by 47% in the past year, currently retailing at KSh370 ($3.17), compared to KSh252 in May 2021.

Within the same period, the price of 2kg of wheat flour has risen by 28%, maize has increased by 23%, and the price of fuel has risen by 21%.

Last week, the CBK tightened monetary policy, citing the need to tame inflationary pressures. The Central Bank Rate (CBR) was increased to 7.5% after maintaining it at 7% for two years. This ushers in costlier loans, especially for households whose borrowing levels have outstripped other critical sectors of the economy.

However, “the side effect (of the CBR) will make the cost of credit expensive,” says economist Gichinga. “Business [activity] will decline and job outlooks [will be] revised downwards.”

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