The Kenyan shilling on Monday fell to a new low against the US dollar, signalling a rise in the cost of living amid a biting dollar scarcity in the market.
This is in the wake of debt repayment by government, low earnings from exports and the dividend-paying season by listed companies, which traditionally move billions in dollars abroad to pay foreign shareholders pay shareholders.
Yesterday, the Central Bank of Kenya (CBK) quoted the shilling at 129.24, a new low, from 128.59 last week.
Banks and forex bureaus are however selling the dollar at about Sh143, amid rationing, which has affected manufacturers and importers.
“To optimise forex gains, the commercial banks want to hold onto more dollars so they can sell at higher rates under the speculation that the Kenya shilling continues losing," FXPesa's lead market analyst Rufas Kamau said.
Central Bank of Kenya (CBK) has been holding on to the falling forex reserves as the country navigates external debt repayment obligations.
The reserves dropped to $6.56 billion (Sh849 billion) last week, from $6.61 (Sh854.7 billion) the previous week, which is 3.67 months of import cover.
This is below the preferred four-month cover.
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 have been forced to pass the increased import bill to consumers and subsequently keeping inflation high.
The dry weather conditions with severe drought in some parts of the country has not helped the situation as farm produce prices have gone up.
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 non-alcoholic 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 said.
These three divisions account for more than 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.
"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.
Key imports whose prices are likely to go up include petroleum products, machinery, medicine and pharmaceuticals products, vegetable oil, wheat, clothing and shoes, clinker, electrical supplies and electronics.
Construction materials for value addition, agricultural raw material imports, textile value addition items and steel are also affected, as Kenya remains a net importer.
Banking experts last week blamed the dollar crisis and subsequent weakening of shilling to among others, 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.
