WEAK

Shilling slides to new all-time low amid strong dollar demand

Exchanged at 113.36 on Friday.

In Summary

• AZA Finance attributes the weakening of the shilling to broad demand for the greenback that outstripped supply from remittances and exports.

•Usable foreign exchange reserves however remain adequate at $8.7 billion as of January 6, CBK data indicates, which is 5.36 months of import cover.

A cashier at a Nairobi forex bureau counts dollars and shillings/
A cashier at a Nairobi forex bureau counts dollars and shillings/
Image: FREDRICK OMONDI

Kenya's shilling weakened to a new low on Friday as traders continued to seek the dollar on picking international trade.

This comes with the re-opening of the economy and increased business activities after a slow-down over the festive season.

The Central Bank of Kenya quoted the shilling at 113.36 against the US dollar, sliding from 113.20 that commercial banks quoted last Friday.

The weak shilling comes amid a drop in inflows with monthly diaspora remittances recording mixed performances last year.

Remittances dropped 5.1 per cent in November, at $320.1 million, compared to $337.4 million in October, a factor attributed to seasonal trends.

Even so, CBK indicates the amount was 24.2 per cent more compared to a similar period the previous year’s $257.7 million.

The cumulative inflows for the 12 months to November totaled $3.67 billion compared to $3.045 billion in the same period in 2020, a 20.4 per cent increase.

The usable foreign exchange reserves however remain adequate at $8.7 billion as of January 6, CBK data indicates, which is 5.36 months of import cover.

“This meets the CBK’s statutory requirement to endeavor to maintain at least four months of import cover, and the EAC region’s convergence criteria of 4.5 months of import cover,” it notes.

Currency trading solutions provider, AZA Finance, has attributed the weakening of the shilling to broad demand for the greenback that outstripped supply from remittances and exports.

“Given that the country’s FX reserves remain adequate at just under $8.8bn—sufficient for 5.36 months of import cover—we expect the shilling to find some support at current levels in the near term,” said Terry Karanja, Treasury Associate at AZA.

Meantime, higher yields on Kenya’s short-term debt saw demand for its latest treasury bill auction hit a two-month high, with its 91-day and 364-day bills oversubscribed by 141% and 112%, respectively.

A weak shilling has an implication on imports, meaning Kenyans will spend more to bring in commodities such as cars, foodstuff, industrial material, and apparel, as the country remains an import-dependent economy.

Exporters and farmers of commodities such as tea however reap from a strong dollar to the shilling as the commodity is traded on the greenback.

Holders of dollar accounts also benefit at such times, making gains from the exchange rate.