WEAKER

Shilling hits 9-month low, projected to fall further

Economic recovery pushing up demand for hard currency, analysts say.

In Summary

•CBK has traditionally tapped into the forex reserves to cushion the shilling by availing more dollars in the market.

•On Friday, it affirmed the local currency remains stable against major international and regional currencies.

A cashier at a local Forex count dollars and shillings
A cashier at a local Forex count dollars and shillings
Image: Fredrick Omondi

The Kenya shilling yesterday weakened against the US dollar hitting a nine month low of 110.16, amid increased import activities by local traders.

It is 1.52 units shy of the all time high of 111.68 it hit in December 2020.

Yesterday, analysts projected the shilling is likely to dip further on pressure from rising global crude oil prices, with Kenyan being a net importer of refined petroleum products.

On a year-to-date basis, the shilling has depreciated by 0.82 per cent as compared to a 7.7 per cent depreciation in 2020.

The country's high import bill which closed at Sh1.04 trillion in 2020–Economic Survey 2021, is adding pressure as demand for the dollar continue to rise in the wake of re-opening of economies and international trade.

“We anticipate that diesel and petrol prices will continue to increase as they trail global crude oil prices which have been on the rise due to global economic demand growing. This will exert more pressure on the shilling which is likely to lead to further depreciation,” researchers at AIB Capital have noted.

The weakening shilling is being fed by both external and internal factors, financial expert and economist Mihr Thakar explained yesterday, noting the imminent US monetary normalisation, pegged on decreasing asset purchases and eventually even mop ups with monetary policy changes is boosting dollar strength.

“As the global economy rebounds and asset prices and inflation reach seemingly peak levels, safe haven demand for the dollar is also emerging,” Thakar said.

On the local front, economic recovery and hence higher imports, high shipping prices, elevated oil and other commodity prices is pushing up demand for hard currency.

The current account deficit surged to 5.4 per cent of GDP in the 12 months to July 2021 compared to 4.9 percent of GDP in the 12 months to July 2020.

“Lower service receipts on unsatisfactory tourism recovery is also to blame,” he added.

CBK has traditionally tapped into forex reserves to cushion the shilling by availing more dollars in the market.

On Friday, it said usable foreign exchange reserves remained adequate at $9.6 billion (about Sh1.06 trillion).

This is about 5.88 months of import cover.

“This meets the CBK’s statutory requirement to endeavour to maintain at least four months of import cover, and the EAC region’s convergence criteria of 4.5 months of import cover,” CBK said in its weekly bulletin.

CBK has also affirmed the local currency remains stable against major international and regional currencies.

Last week, liquidity in the money market was relatively tight during the week ending , mainly as a result of higher government receipts compared to payments, CBK notes, with commercial banks’ excess reserves standing at Sh 3.9 billion in relation to the 4.25 per cent cash reserves requirement.

Even so, open market operations remained active with the average inter-bank rate being recorded at 4.19 per cent, compared to 3.62 per cent the previous week.

Meanwhile, rising fuel prices which hit a historic high last week are expected to add pressure on inflation which rose to an 18-month high in August, at 6.57 per cent, from 6.55 per cent in July.