DEPRECIATION

Shilling drops to historic low of 110.05 against US dollar

Yesterday, it marked two weeks consistent drop, pushing a year on year drop to 8.6 per cent.

In Summary
  • The drop is likely to trigger an increase in the cost of living as importers pass the bill to consumers.
  • However, exporters are likely to earn more on the weakening shilling as they are paid in the greenback.
A trader changes dollars for naira at a currency exchange store in Lagos, Nigeria, February 12, 2015. /REUTERS
A trader changes dollars for naira at a currency exchange store in Lagos, Nigeria, February 12, 2015. /REUTERS

The Kenya shilling hit a new historic low on Monday to trade at 110.05 units to the US dollar, signaling a rise in the cost of living as importers pass the bill to consumers. 

The local currency has come under pressure in recent months as demand for dollars surged in a period that has hurt the supply of dollars on low tourist arrivals and a reduction in exports of agricultural produce.

The local currency has been on a downward trend since the country reported the first coronavirus case in mid-March when it was trading in the range of 101-103. On Friday, it closed at 109.96 Friday.

 
 

Yesterday, it marked two weeks of consistent drop, pushing a year on year drop to 8.6 per cent. 

The shilling has also been dragged down by demand for hard currencies from importers resuming business after the government eased Covid-19 containment measures in July.

Analysts are projecting even tougher times ahead for the shilling as key forex earners for the country - (tourism and horticultural exports) continue to reel from the vagaries of Covid-19. 

Production of cut flowers dropped 19 per cent in the first nine months of the year, while coffee output slumped 31 per cent. Kenya is the biggest supplier of flowers to Europe.

Betty Mwendia, a freelance money market analyst told the Star that the shilling will remain under pressure for the next three months as the Covid-19 fears decline globally. 

''The global market is still uncertain. Tourists are still cautious and horticultural enthusiasts are holding onto their cash. News about coronavirus vaccines is positive,'' Mwendia said. 

Mathew Kabeere, a trading Specialist at EGM Securities told Bloomberg that measures to contain the spread of the virus slowed inflows of dollars, adding to pressure on the shilling.

 
 

‚ÄúThere is a lot of uncertainty globally and people prefer holding dollars and other hard currencies,'' Kabeere said. 

Apart from sparking a high cost of living, the depreciating currency is also likely to increase the country's debt obligation, considering that 65 percent of external debt is denominated in US dollars.

However, exporters are likely to earn more on the weakening shilling as they are paid in the greenback