Kenyan Central Bank Records Substantial Gains in Forex Holdings

In the fiscal year leading up to June 2023, the Central Bank of Kenya (CBK) witnessed a remarkable increase in unrealized exchange gains on its dollar reserves, reaching Sh131.5 billion. This figure marked a substantial surge compared to the Sh68.6 billion recorded in the previous year. The surge in value was attributed to the significant depreciation of the Kenyan shilling against the US dollar during this period.

This considerable boost in forex holdings contributed to the CBK’s net surplus for the year, which soared to Sh150.5 billion, a notable increase from Sh76.9 billion reported in the year ending June 2022, as revealed in the regulator’s latest annual report.

The CBK plays a pivotal role as the custodian of Kenya’s official foreign reserves, which, by the end of June, stood at $7.48 billion (equivalent to Sh1.115 trillion at the current exchange rate).

These reserves are a vital national asset, safeguarding the availability of foreign exchange to meet the country’s obligations in hard currency, including imports and external debt servicing.

The increased value of these reserves was largely driven by the shilling’s depreciation against the dollar, which weakened by 19% in the twelve months leading to June, with an exchange rate of 140.52 units.

This trend favored holders of dollars, while importers continued to grapple with losses stemming from higher forex purchase costs.

The CBK’s realized gains, or net earnings, for the year also experienced a notable increase, rising from Sh8.33 billion in 2022 to Sh19 billion in 2023. This surge was attributed to higher returns from the bank’s securities and deposits.

The central bank’s annual report stated, “During the financial year ended 30 June 2023, the Bank’s operating surplus was Sh19 billion (2022: Sh8.33 billion) due to higher average returns on the securities portfolio and deposits.

An unrealized foreign exchange gain of Sh131.49 billion was recorded during the year (2022: Sh68.56 billion) due to the strengthening of the US dollar against the shilling.”

Additionally, the CBK reported a fair value loss on fixed income securities, held at fair value through other comprehensive income (FVOCI), amounting to Sh4.69 billion in 2023, significantly lower than the loss of Sh21.61 billion in 2022 due to a decline in market prices.

With the doubling of realized gains to Sh19 billion, the CBK increased its dividend to the Consolidated Fund by Sh1 billion, reaching Sh5 billion for the period.

Both realized and unrealized gains were added to the CBK’s general reserve fund, which, by the end of the period, had accumulated a realized surplus of Sh65.5 billion (compared to Sh54.47 billion in 2022) arising from the bank’s regular operations, along with unrealized gains of Sh301.24 billion (in contrast to Sh172.5 billion in 2022).

In the fiscal year ending June 2022, the CBK utilized part of the realized gains to enhance its paid-up capital, increasing it to Sh38 billion from Sh35 billion in 2021.

Reflecting a similar trend, the private sector has also been capitalizing on the gains offered by holding onto dollars in recent months.

Their holdings of the US dollar in local bank accounts reached a record Sh1.25 trillion equivalent by the end of July. This significant increase from the Sh904.2 billion recorded a year earlier primarily reflects gains made on these holdings.

However, concerns remain about accessing forex in the market, although the situation has improved compared to earlier in the year when a non-functioning interbank dollar market constrained the supply of dollars to the economy.

Corporates account for approximately 70% of Kenya’s dollar deposits, with households holding the remaining portion, indicating that most of these deposits are not speculative in nature.

Nevertheless, for commercial banks, where these dollar deposits sit as liabilities, the sharp increase in value poses challenges as they have more forex liabilities than assets.