•This now piles pressure on manufacturers and importers with an expected rise in commodity prices, as the country remains a net importer.
•The shilling is expected to remain weak with projections of further drops in the medium-term amid persistent forex demand.
The Kenyan shilling has hit a new low of 129 to the US dollar amid a scarcity of the greenback, which continues to be witnessed in the country.
This now piles pressure on manufacturers and importers with an expected rise in commodity prices, as the country remains a net importer.
Central Bank of Kenya (CBK) has been holding on to the falling forex reserves as the country navigates external debt repayment obligations.
Cumulatively, the shilling has dropped 12 per cent against the dollar, the highest in two decades, pushing up the cost of living as importers struggle to consolidate hard currency.
Importers are currently buying a dollar at up to 143, and have been forced to pass the increased import bill to end consumers, pushing up commodity prices with inflation expected to go up after an increase last month.
The dry weather conditions with severe drought in some parts of the country have also seen the prices on farm produces increase on reduced yields.
The Kenya National Bureau of Statistics (KNBS) recorded February inflation at 9.2 per cent, up from nine per cent in January.
“The rise in inflation was largely due to increase in prices of commodities under food and nonalcoholic beverages (13.3%); housing, water, electricity, gas and other fuels (7.6%); and transport (12.9%) between February 2022 and February 2023,” KNBS director general Macdonald Obudho, notes in the recent inflation data.
These three divisions account for over 57 per cent of the weights of the 13 broad categories.
Prices of commodities under furnishings, household equipment and routine household maintenance recorded an increase of 8.8 per cent over the period.
The shilling is expected to remain weak with projections of further drops in the medium-term amid persistent forex demand from importers, as well as the impact of rising inflation.
According to trading solutions provider – AZA Finance, dry weather conditions are impacting vegetable crops, pushing prices higher and increasing the cost of living.
External debt repayment obligations are also contributing to broader forex scarcity, which has led to fuel shortages as importers are unable to get hold of enough dollars to replenish their stocks, it notes.
“With the lack of rain likely to impact harvests and push inflation higher, we expect the shilling to continue depreciating in the near term,” notes Terry Karanja, senior treasury associate at AZA Finance.
Renaissance Capital has projected the shilling to close the month at 130 as the US dollar continues to strengthen. It has gained a massive 17 per cent in the past 12 months.
"The dollar is expected to continue with its charm offensive in the coming months, a move likely to further hurt weak currencies, piling pressure on already high inflation,'' the financial service advisory firm said.
Kenya's global broker FXPesa also foresees the shilling hitting a record low of Sh130 to a dollar, impacted by Federal Reserve Rate (Fed rate) hikes.
A market outlook by the firm, the first to offer Forex and CFD products for the retail market in East Africa, indicates a review of the Fed rate will fuel the current depreciation of the shilling.
"A strong recovery in the dollar index is likely to push the USDKES to 130 as demand for US treasuries continues to rise because of higher interest rates,'' FXPesa's lead market analyst Rufas Kamau told the Star.
Meanwhile, banking experts are linking the ongoing dollar crisis and subsequent weakening of shilling to the CBK’s tough interbank forex regulations.
Several banking sector insiders and money market analysts say the ban has resulted in a parallel foreign exchange market that has seen traders buy a dollar at a high of Sh143, more than 10 units above CBK's rate.
"There is no US dollar shortage in the country. We actually have a surplus. Banks used to trade forex amongst themselves for profit but CBK banned this, accusing lenders of speculating against the shilling,'' a senior official at a tier one bank told the Star in confidence.
The regulator has continued to insist that there is sufficient foreign currency in the country to meet demand, brushing off dollar shortage concerns by importers.
In June last year, CBK Governor Patrick Njoroge said that Kenya’s foreign-exchange market generates and distributes about $2 billion a month, which is enough to meet all demand in the economy.