GLEAM OF HOPE

Shilling hits 9 month high, signals expected decrease in cost of living

The country's import dependent economy always feels pressure if there is a sudden rise in cost of various imported goods

In Summary
  • The Kenya shilling hit a 9 month high of 107.15 on Sunday.
  • According to the IMF, Kenya’s real effective exchange rate has been on an appreciating trend however it suggests that the Kenya Shilling overvalued by 9.1 per cent.
Kenya Coins
Kenya Coins
Image: Eric Thuo

The Kenya shilling has been on a strengthening streak against the dollar over the past one week, hitting a 9-month high of 107.11 on Monday.

This is the strongest level since July 11, 2020 when it was at 107.14.

This sentiment signals easing pressure on the local unit which had come under pressure from major world currencies in the past year, leading to a high cost of living in the country.

The country's import dependent economy always feels pressure if there is a sudden rise in cost of various imported goods.

The strengthening shilling therefore presents a gleam of home to the current high cost of living as it will result in a decrease in the cost of goods.

The cost of living in March hit an 11-month high of 5.9 per cent on account of higher cost of fuel.

On April 9, Reuters reported that the shilling strengthened to an eight and a half month-high against the dollar spurred by inflows from foreign investors interested in investing in a government infrastructure bond.

According to the latest CBK weekly bulletin, usable foreign exchange reserves grew to $7,425 million (4.56 months of import cover) as at April 8 compared to $7,343 million as at April 1.

Financial expert, Mihr Thakar says the improved sentiment comes on the back of projected foreign debt inflows into the government accounts over the medium-term, normalisation of the macroeconomic environment & momentum traders selling their foreign exchange holdings due to portfolio inflows.

Thakar also noted that while while the prospect of economic recovery is now definitely watered down, increased foreign borrowing could also be bringing some medium-term optimism on to the local unit.

According to the International Monetary Fund(IMF), Kenya’s real effective exchange rate (REER) has been on an appreciating trend in recent years however it suggests that the Kenya Shilling overvalued by 9.1 per cent.

“Despite a stable nominal effective exchange rate (NEER), relatively higher inflation rate than in trading partners had in recent years contributed to medium-term real appreciation, and Kenya’s REER had appreciated more than its regional peers,” said IMF

The international lender however noted that in 2020 the appreciating trend reversed, and the annual average REER depreciated slightly by 1.5 percent compared to 2019.

“Since March 2020 the REER has gradually depreciated as the exchange rate absorbed some of the impact of the Covid-19 shock, which has reduced sources of foreign exchange for Kenya. By December 2020, the REER had depreciated by about 8 percent compared with December 2019,” said IMF

The External Balance Assessment REER model used by the IMF suggests a gap of 9.1 percent for the shilling in 2020.