Kenya’s official foreign exchange reserves have fallen below the statutory threshold of four months’ worth of import cover, leading to concerns about the country’s vulnerability to external shocks.

The Kenyan shilling is at risk of further depreciation after the reserves fell to their lowest level in almost a decade, standing at $6.939 billion or 3.88 months’ worth of imports. Forex reserves refer to a stock of foreign currencies held by the Central Bank of Kenya in the form of banknotes, deposits, bonds, Treasury Bills, and other government securities.

The reserves serve as a safeguard to meet external obligations such as foreign debt payments and imports. The primary focus of the CBK in managing the reserves is capital preservation, with safety, liquidity, and maximization of returns also playing a role.

Although there is no upper limit on forex reserves, the CBK Act mandates maintaining official reserves equal to the value of four months’ imports. A fall in reserves below this level does not necessarily trigger a crisis, according to the CBK governor, although it can have psychological significance and lower investor confidence in the country’s ability to manage external shocks.

The depletion of reserves can be attributed to the reduction in hard currency inflows from external debt funding and the rise in external debt repayments, leading to thinner reserves. The CBK can rebuild the reserves through Kenya’s renewed access to foreign financing, additional tightening of monetary policy, or by influencing the flow of foreign currency into the country.

However, the value of the shilling does not have a direct link to the level of reserves.

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