Kenya‘s net international assets decreased by Ksh 87.1 billion ($ 769.7 million) in the year through September, the largest decrease ever, suggesting local financial institutions liquidated some of their overseas portfolios.
The net external assets (NFA) refer to the total external assets of the banks and the central bank of Kenya minus the external liabilities of the institutions.
“The net international investment position decreased from Ksh 751.2 billion (US $ 6.6 billion) at the end of September 2020 to Ksh 664.1 billion (US $ 5.8 billion) at the end of September 2021,” said the Kenya National Bureau of Statistics in its third quarter GDP report.
Stable or growing net international assets are likely to increase the relative value of the Kenyan shilling, while the opposite could lead to a depreciation of the local currency against others.
A stronger shilling helps lower import costs as Kenya supplies a wide range of consumer and capital goods such as petroleum products and industrial machinery.
A weaker shilling contributes to inflation, but it can benefit certain actors such as exporters whose goods are cheaper from the perspective of foreign buyers.
However, the net international investment position alone 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, according to the World Bank, its financial institutions owed foreigners more money than they owned overseas.
This marks the biggest drop in assets, growing from a low of Ksh 30 billion ($ 264.9 million) in 1993 to highs of $ 885 billion in the first half of last year.
The Ministry of Finance has attributed the decline in external assets to a decline in the foreign exchange reserves of the CBK, in addition to a decline in banks’ deposits abroad.
The CBK’s foreign exchange reserves are usually issued when the institution intervenes in support of the shilling or makes payments to foreign lenders as the government’s fiscal agent.
Kenya’s growing appetite for international borrowing through the issuance of dollar denominated bonds has increased in recent years, making debt servicing a major contributor to changes in net international wealth.
The weakening of the schilling is also likely to erode assets through inflation in financial institutions’ foreign currency debt.
The local currency lost value in February 2020, trading from 100 units to the dollar at 113 units per dollar – a month before the country registered its first case of coronavirus.
The pandemic resulted in a significant weakening of the local currency due to lower exports and widespread disruption to economic activity, including severe restrictions on sectors such as tourism and transport.
The shilling has lost ground against most major currencies, including the euro, pound sterling and the US dollar.
The devaluation continued even after the corona-related restrictions were lifted, 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 as a result of the gradual easing of containment measures to contain the spread of the disease,” KNBS said.
“Real GDP grew 9.9 percent in the third quarter of 2021, compared to a 2.1 percent decline in the same quarter of 2020.”
According to the KNBS, performance was driven by significant rallies in most economic activity, which had contracted in the third quarter of 2020.
Sectors that supported overall growth included manufacturing, which grew 9.5 percent, education (64.7 percent), transportation and storage (13 percent), and accommodation and catering (24.8 percent) Percent) and the finance and insurance business (6.7 percent).
“However, agricultural production has been limited due to the drought conditions that characterized the quarter under review in most of the country,” the KNBS said.
“The agriculture, forestry and fishing sectors contracted 1.8 percent in the review, compared to a 4.2 percent growth in the same quarter of 2020.”
The decline was seen in the significant decline in fruit exports, sugar cane deliveries, tea production and coffee exports, the statistics agency said.