- A deterioration in market liquidity amplifies price swings with forced selling and deleveraging.
- This can lead to disorderly conditions in asset markets that could threaten broader market functioning and stability.
The shilling will continue taking a further beating from the US dollar unless financial market strains witnessed in the buying and selling of assets improves
The International Monetary Fund's (IMF) financial market outlook projects a stability risk on the currency amid the continued liquidity strains.
The lender notes that further strengthening of the Greenback will add more pressure on importers as prices of import commodities will continue to take an upward trajection.
“A deterioration in market liquidity amplifies price swings with forced selling and deleveraging. This can lead to disorderly conditions in asset markets that could threaten broader market functioning and stability,” IMF says
The lender further adds that spillover effects from disorderly asset markets could also increase borrowing costs for governments and corporations, worsening financial conditions.
The strengthening dollar which exchanged at 121.37 against the dollar on Tuesday has seen the local currency decline by almost 7.26 per cent since the start of the year amid speculations of further decline.
A weaker currency means Kenyan households will have to contemplate high commodity prices, as the country remains a net importer.
This will hit hard homes that have continued to battle month-on-month increases in inflation, which hit a seven year high in October at 9.6 per cent.
According to data by the Kenya National Bureau of Statistics (KNBS), the rise was occasioned by the sharp increase in the cost of food and non-alcoholic beverages.
In addition, the stumbling shilling influences the external debt repayments that are putting pressure on the current account deficit.
Kenya’s current account deficit as a percentage of GDP widened to 5.1 per cent in April from 4.8 per cent a year earlier due to higher import costs for fuel, food and industrial goods.
These had outweighed inflows from agriculture exports and diaspora remittances.
The Central Bank of Kenya has in the recent past tried to support the weakening shilling in a move that saw the country's forex reserve sink to the lowest level since October 2017.
This was in early September where the apex bank's weekly bulletin showed that the reserves had dropped by Sh28 billion in the week ended in September 2 to $7.37 (Sh884 billion) billion from $7.6 billion (Sh912 billion) the previous week.