•The weak shilling means costlier imports and a rise in the cost of living.
•The political instability is expected to continue weighing on the shilling in coming days, currency trading solutions provider, AZA Finance, says.
Image: FREDRICK OMONDI
The Kenyan shilling fell to a historic low against the dollar on Friday with analysts projecting further weakening this week, on the back of uncertainty in the country’s political environment.
The local currency which has been on a losing streak against major currencies, weakened to exchange at 120 to a unit of the dollar, setting the ground for costlier imports and a rise in the cost of living.
Investors are viewing the country’s political environment as uncertain where Presidential candidate Raila Odinga has moved to court to challenge President-elect William Ruto’s win.
The country’s Supreme Court has 14 days to make a ruling.
While the currency recovered slightly to 119.84, it remains weaker than last week’s close of 119.62.
“We expect the political instability to continue weighing on the Shilling in coming days, pulling back to 120 levels,” said Terry Karanja, Senior Treasury Associate at currency trading solutions provider, AZA Finance.
The weakening shilling comes amid continued reports of a shortage of the dollar in the market mainly by importers, on the back of a shrinking forex reserves.
The country’s foreign exchange reserves are now at 4.39 months of import cover, as at August 25, below the East African Community’s target of 4.5 months.
Central Bank of Kenya however says usable foreign exchange reserves remained adequate at $7.61 billion (Sh 917 billion), which meets its statutory requirement of at least four months of import cover.
According to Financial Risk Analyst Mihr Thakar, a large number of factors are working against the Kenya Shilling, among them a drop in exports.
Horticultural exports, for instance, plunged 8.5 per cent in the 12 months to June 2022 against a similar period last year, Thakar noted.
“Although, overall goods exports surged 11.2 per cent , this was far surpassed by the 21.7 per cent growth in imports of goods,” he said.
Moreover, cracks have begun showing in remittances due to the high cost of living and election related uncertainty, having declined 5.1 per cent in July 2022 versus July 2021, he notes.
“The lack of a substantive government and heightened opposition activism is likely to keep sentiment skewed on the side of caution,” Thakar added.
The US Fed has also continued to signal its aggressive rate stance, in the fight against inflation.
However, the macroeconomic environment is expected to improve once policy level clarity has returned, Thakar said.
Local manufacturers remain concerned over the dollar shortage, with fears of a developing black market.
The shortage which heightened in June continues to affect orders of raw material with high import costs pushing up the prices of basic commodities such as flour, cooking oil and other consumables.
The shilling’s depreciation is further attributed to increased demand for dollars from importers of oil, industrial inputs and machinery, which have increased at a far more severe pace and intensity than the price of Kenya's predominantly agricultural exports.
Prices of petroleum products have also gone up on high crude prices and a weak shilling.
The cost of living in Kenya hit a high of eight per cent in July ahead of the elections, a trend that has been witnessed in past election years.
Annual inflation hit 8.3 per cent in July, the highest reading since September 2017, a year that the country witnessed a nullified elections.
In July, Kenyans took to the streets to protest high cost of living, which has been hugely blamed on global supply chain disruption caused by the Russia-Ukraine war, with the two countries being major food baskets and producers of key industrial material.