Kenya’s foreign wealth shrinks by $ 769 million
Kenya’s net foreign assets fell by Ksh 87.1 billion ($ 769.7 million) in the year through September, the largest drop to date, indicating that local financial institutions have liquidated some of their portfolios abroad.
Net Foreign Assets (NEA) refer to the total foreign assets held by banks and the Central Bank of Kenya less foreign liabilities of institutions.
“Net foreign assets increased from Ksh 751.2 billion ($ 6.6 billion) at the end of September 2020 to Ksh 664.1 billion ($ 5.8 billion) at the end of September 2021”, Kenya’s National Bureau of Statistics said in its third quarter GDP report. .
Stable or growing net foreign assets are likely to increase the relative value of the Kenyan shilling, while the reverse could cause the value of the local currency to fall against others.
A stronger shilling helps lower the cost of imports, as Kenya ships a wide range of consumer and capital goods such as petroleum products and industrial machinery.
A lower shilling contributes to inflation but may benefit some players such as exporters whose goods become cheaper from the perspective of foreign buyers.
The net international investment position alone, however, is not the only determinant of a country’s macroeconomic stability.
Assets indicate whether a country is a net creditor or a net debtor. Kenya was a debtor country between 1982 and 1992 when its financial institutions owed foreigners more money than they had abroad, according to World Bank data.
This is the largest drop in assets, which fell from a low of Ksh 30 billion ($ 264.9 million) in 1993 to a high of Sh 885 billion in the first half of last year.
The Treasury attributed the decline in foreign assets to a reduction in the CBK’s foreign exchange reserves in addition to a decline in bank deposits abroad.
The CBK’s foreign exchange reserves are usually spent when the institution steps in to support the shilling or makes payments to foreign lenders as a tax agent for the government.
Kenya’s growing appetite for international borrowing through the issuance of dollar-denominated bonds has grown in recent years, making debt servicing a major factor in changes in net foreign assets.
The weakening of the shilling also risks eroding assets by inflating the debt of financial institutions in foreign currencies.
The local currency depreciated to trade at 113 units to the dollar, from 100 units to the greenback in February 2020 – a month before the country registered its first case of the coronavirus.
The pandemic has resulted in a significant weakening of the local currency due to a reduction in exports and a wide disruption of economic activity, including severe restrictions on sectors such as tourism and transport.
The shilling has lost ground against most major currencies, including the euro, British pound, and US dollar.
The depreciation continued even after the removal of restrictions related to the coronavirus which led to a strong economic recovery.
“The economic recovery from the effects of the Covid-19 pandemic continued in the third quarter of 2021 thanks to the gradual relaxation of containment measures instituted to curb the spread of the disease,” said KNBS.
“Real GDP grew 9.9% in the third quarter of 2021, compared to a contraction of 2.1% in the same quarter of 2020.”
KNBS said the performance was due to strong rebounds in most economic activities which contracted in the third quarter of 2020.
Industries that supported overall growth included manufacturing which increased 9.5 percent, education (64.7 percent), transportation and warehousing (13 percent), accommodation activities and catering (24.8 percent) and financial and insurance activities (6.7 percent.
“However, agricultural production was limited due to the drought conditions that characterized the quarter under review in most parts of the country,” KNBS said.
“The agriculture, forestry and fishing sector contracted 1.8% during the review, compared to growth of 4.2% in the same quarter of 2020.”
The contraction resulted in a significant drop in fruit exports, cane deliveries, tea production and coffee exports, the statistical agency said.