The low and low of shilling in 2021

The drop has seen the country's forex reserve fall as the Central Bank helps to iron out volatilities.

In Summary
  • Yesterday, it dropped to a new low of 113.30 in mid morning hours
  • This has piled pressure on the cost of living and Kenya's debt service obligation
A cashier at a local Forex count dollars and shillings
A cashier at a local Forex count dollars and shillings
Image: Fredrick Omondi

The shilling touched a new low yesterday, further piling pressure on the import bill, pushing up the cost of living. 

The local currency depreciation, however, is good news to exporters who are fetching high returns. 

The Google Currency Tracker mapped the shilling at 113.30 against the greenback in mid-morning hours before falling to 113.19 by the time of going to press. 

The shilling has recorded a significant drop against major international currencies this year, despite starting more resiliently against the greenback, trading in the range of 109 after a hiatus 2020 rocked by Covid-19 shortcomings. 

The drop has seen the country's forex reserve fall as the Central Bank helps to iron out volatilities. This was exacerbated by declined earnings in tourism and agricultural exports. 

According to the latest CBK Weekly Bulletin, the usable foreign exchange reserves remained adequate at $8.56 billion (5.23 months of import cover) as of December 23.

''This meets the CBK’s statutory requirement to endeavor to maintain at least 4 months of import cover, and the EAC region’s convergence criteria of 4.5 months of import cover,'' CBK said.

Reserves have been on a persistent drop since last month despite heavy diaspora remittances inflows. 

The drop in value of the local currency has seen the cost of living rise even as analysts warn of even tougher times ahead. 

An analysis by the AIB-AXYS Africa for instance expects the local currency to come under increased pressure as the import bill rises on the back of crude oil prices.

“The recent increase in petrol and diesel prices has contributed to the current depreciation of the shilling,” said the stockbroking and investment firm.

“We anticipate that diesel and petrol prices will continue to increase as they trail global oil prices. It would have been tough, save for the ongoing government subsidy,'' the firm said in its weekly note. 

Apart from the cost of living, the decline in the value of the local currency is expected to pile pressure on the country's debt obligation considering that over 65 per cent of the external debt is denominated in US Dollar. 

Kenya’s debt service costs, which are expected to surge by 22 per cent this fiscal year, are set to rise even further as the East African economy’s currency sinks to all-time lows against the dollar.

Even so, some  Renaissance Capital insists that the shilling is overvalued and, based on the real effective exchange rate (REER) model, could weaken to 119 units to the dollar next year.

This is not the first time the Moscow headquartered firm is saying in its annual note.  Last year, it projected the shilling to rise above 110 by June, a projection that came to pass. 

“The Kenyan shilling is over 20 per cent overvalued on our REER model, with a fair value of Sh114 per dollar, by our estimate, implying that it is inclined to depreciate,” said the firm.

The Central Bank of Kenya (CBK) has, however, dismissed such analysis, saying that the local currency portrays its true market value. 

An independent economist and money market expert Terry Ogeto says that If the shilling continues to drop, global prices continue and low circulation of money in the local economy,  2022 will be really tough.