DEPRECIATION

Shilling to slide post cap law as imports rise on credit access - Study

Central Bank of Kenya quoted the shilling at 101.75 against the dollar, a slight improvement compared to a mean of 101.96 Thursday

In Summary
  • The report added that notable stability of USD-KES over the past three years was driven largely by weakening domestic demand
  • The access to credit is also likely to have a detrimental effect on the country’s CAD, which has been narrowing, hitting 4.2 in July
SOUGHT: The US dollar was in high demand yesterday from oil importers.Photo/File
SOUGHT: The US dollar was in high demand yesterday from oil importers.Photo/File

The shilling is expected to drop significantly against the dollar after the interest cap was scrapped as access to credit boost import demand, a research firm, EFG Hermes has said.

According to EFG Hermes, a more accommodative monetary policy environment, in addition to the repeal of the rate caps, is going to help accelerate credit growth as banks open the door wide for lending to the private sector, increasing households’ spending power, thus more imports.

‘’Higher credit growth should, in tandem, boost domestic demand, and in turn, imports over the medium term, providing the Shilling with less of the accommodative environment it has enjoyed over the past three years,’’ EFG Hermes Kenya head of Equities Mwathi Kilonzo said.

 

The report added that notable stability of USD-KES over the past three years was driven largely by weakening domestic demand, best reflected in negative real credit and falling imports which, together with strong remittances, drove a sustained narrowing of the country’s Current Account Deficit (CAD).

‘’We emphasise that this does not mean any immediate pressure on the currency – which still enjoys a strong reserves position and manageable CAD – but we are just flagging changed dynamics that could, potentially, create some pressures for a currency that has barely moved in nominal terms for a few years now,’’ the report said.

The access to credit is also likely to have a detrimental effect on the country’s CAD, which has been narrowing, hitting 4.2 in July but rose in November by 10 basis point to 4.3 per cent, according to CBK.

The shilling which was strengthening especially against the greenback before President Uhuru Kenyatta signed the Finance Bill, 2019 into law, effectively repealing the cap law imposed in 2016 early last month started losing grounds.

Last month, the shilling threatened to break the Sh100 mark level against the dollar, dropping from 102.91 on November 6 to Sh101.15 on November 20. It, however, embarked on a declining mode, hitting 102.71 before the end month.

Central Bank of Kenya quoted the shilling at 101.75 against the dollar, a slight improvement compared to a mean of 101.96 Thursday.

The study has also warned of possible high domestic borrowing costs for the government as banks retreat back to lending to the private sector for lucrative gains.

 

The introduction of interest cap law saw banks shy from lending to the private sector, opting for more secure government papers.

‘’We, therefore, see the gov’t facing elevated, if not rising, borrowing costs in the coming period, adding more pressure on fiscal balances, which have been challenged in recent years by poor revenue collection. Such pressure increases the urgency further for much-needed fiscal consolidation, especially given rising public debt levels,’’ the report said.