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Shilling drops further on demonitisation effects

The shilling has been on a swing since the CBK announced plans to phase out the old Sh1000 banknote

In Summary

• Central Bank of Kenya quoted the shilling at Sh102.81 buying and Sh102.61 selling, 34 basis points jump compared to Monday trading.

CBK Headquarters
CBK Headquarters
Image: FILE

The Kenyan shilling yesterday dropped further against the dollar, a move traders attributed to demonetisation and increased demand by oil importers and other traders.

Yesterday, the  shilling fluctuated between Sh102.76 and Sh102.93  to the dollar on Google trader during the day, compared to a mean of 102.36 on Monday.

Central Bank of Kenya quoted the shilling at Sh102.81 buying and Sh102.61 selling, 34 basis points jump compared to Monday trading.

The shilling has been on a swing since the Central Bank of Kenya announced plans to phase out the old Sh1000 banknote starting October 1.

Traders told Reuters that oil and merchandise importers were competing for available dollars in the market ahead of October deadline to switch to new Sh1000 notes, pushing up the demand for the greenback while saturating the market with local currency.

"This was long overdue. Most unbanked cash is now in the market, expect the shilling to drop further as the public rush to beat the October 1 deadline,’’ said Clifford Otieno, a financial consultant.

According to Johnson Nderi, a corporate finance adviser at ABC Capital, Kenya's interbank rate is at 2.23 per cent, way below inflation rate due to excess liquidity in the market, affecting the strength of the local currency.

‘’I think CBK is pushing rates down deliberately. When you increase quantity of investible funds, rates tend to come down but it dilutes purchasing power which manifests in higher Consumer Price Index (CPI) CPIs or weaker exchange rates,’’ Nderi said on twitter.

Financial markets analyst Dickson Magecha however said there is no cause to worry, stating that the shilling was among the strongest in the region.

‘’The depreciation is still within allowable range. It is hardly-worthy all the negative mentions. In fact, the shilling by far remains the strongest pair in the emerging nations on a multi-year horizon,’’ Magecha said on twitter.

 

CBK governor Patrick Njoroge defended the weakening of shilling a fortnight ago at a press briefing, blaming the current sway on normal high demand for dollar by importers.

He further dismissed reports that the expected demonitisation exercise to recall old Sh1000 notes by October 1 is pumping excess liquidity in the market as mass holders rush to beat the exchange deadline.

"A lot of money being exchanged is following legal channels. No case of mass dumping has been reported. The effect of few backdoor currency exchange dealers is insignificant. None has been reported either,’’ Njoroge said.

He announced releasing new notes worth Sh540 billion on June 3, two days after unveiling them during the June 1 Madaraka Day celebration in Narok County.

The Sh1,000 notes constituted  83 per cent of the amount, Sh500 notes (5.9 per cent), Sh200 (4.2 per cent), Sh100 (4.8 per cent) and Sh50 (1.9 percent).