MONEY MARKET

Shilling sinks to a new all-time low

Yesterday, IMF said the strong dollar will push inflation and debt obligation to the highest levels, especially in developing nations.

In Summary
  • Pundits expect the shilling to drop to 120 units against the dollar by end of the year
  • Inflation came in at 5.6 per cent in March, up from February's 5.1 per cent.
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

The Kenyan shilling which is on a depreciating trend against the US Dollar sunk to a new low on Wednesday morning, trading at 115.60 when the market opened. 

It had regained ground to trade 115.50 by the time of going to press. 

The drop in value of the local currency amid global supply disruption on Covid-19 eventualities and the ongoing Russia-Ukraine crisis has led to high demand for the greenback, leading to its shortage in the market. 

The US dollar is the leading trade currency internationally, with 0ver 70 per cent of businesses globally accepting it as a legal tender.

Last week, traders told the Star that the dollar shortage in the market is likely to hurt their imports, causing supply glitches of common products in the market. 

The stronger the dollar, the higher the import bill, which is normally passed to end consumers. This is likely to spike the high cost of living. 

Yesterday, the International Monetary Fund (IMF) in its World Economic Outlook report said the strengthening dollar is expected to push inflation and debt obligation to the highest levels, especially in developing nations.

The global lender warned of even tougher times ahead as the US considers to continue hiking Federal Reserve Rate in the coming months.

The Fed raised the target for the fed funds rate by a quarter-point to 0.25 per cent-0.5 per cent during its March 2022 meeting for the first time in three years and signaled ongoing rate hikes ahead.

The Fed now sees rate hikes at each of the six remaining meetings this year, with the fed funds rate reaching 1.9 percent by year's end.

Pundits have it that the shilling could drop to trade at 120 units against the greenback by the end of this year, further piling pressure on the rising cost of living. 

Last week, NCBA Bank, Ernest &Young and KMPG said the shilling will continue sliding against the greenback as foreign investors exit markets in the developing world to re-invest in high-value ventures. 

Foreign investor flight is expected to cause a dollar shortage in the market. The August general election will likely add to the pain, hence the high cost of living,'' EY said in a post-budget media briefing. 

Inflation came in at 5.6 per cent in March, up from February's 5.1 per cent.

Still, annual average inflation was stable at February's six per cent in March. FocusEconomics Consensus Forecast panelists expect inflation to average 6.2 per cent in 2022, which is up 0.1 percentage points from last month's forecast.

Besides pushing up the cost of living, the drop in local currency's value is expected to push up the debt obligation, considering that almost 70 per cent of Kenya's foreign loans are denominated in US dollars. 

Evens so, exporters are likely to reap dividends from the strengthening dollar, earning more for their goods and services.