The local currency, which is rallying towards the 160 mark, has further slid against the US dollar, exchanging at Sh157.49 to a dollar yesterday, having weakened from Sh156.09 in the last week of December.
This was a further drop from the Sh154.69 it averaged at the week before Christmas, according to Central Bank of Kenya data, with the open market having even higher rates.
This means importers are currently spending more to secure dollars compared to December, translating to costly imports and higher commodity prices.
This is on both imported and locally manufactured goods whose raw materials have to be shipped in by manufacturers.
The shilling has shed about 21.4 per cent of its value to the dollar since January last year, when it was trading at Sh123.78.
The dollar strongly rallied against the Kenya shilling for the better part of last year amid a significant capital flight, as investors sought better returns in foreign markets, mainly the US, after the fed rate hikes.
“The Kenya Shilling depreciates mainly because of the higher returns on the dollar. As dollar interest rates begin to fall, speculative hoarding will continue to decrease,” data analyst Mihr Thakar, said yesterday.
The main benefit of the Shilling depreciating, Thakar noted, was a double-digit percentage reduction in the current account deficit.
“As the Central Bank cuts local interest rates in tandem with the Fed, import demand may rebound. In order to rise to previous levels of 100-125, the Kenyan economy will need to experience a tourism, investment and export boom,” Thakar noted.
The government's measures geared towards growing exports to stabilise the shilling against the dollar appear to have not borne the desired effect, according to independent economist and tax expert Clifford Otieno.
“This seems to have been made worse by the unpredictability of the Kenyan investment environment arising out of the recent spate of increases in taxes,” Otieno told the Star.
“Perhaps, a stable tax environment and predictable policy towards taxation would be a good starting point."
If the shilling continues to lose in coming weeks, commodity prices are expected to go up with a possible rise in inflation.
This, even as the government banks of improved food production to help cut down the cost of living where inflation dropped to 6.6 per cent in December, from 6.8 per cent in November.
It is also expected to pile pressure on the country’s forex reserves as importers seek the much-needed dollar to pay for imports.
Usable reserves are currently at $6.6 billion (Sh1.03trillion) compared to $7.41 (1.17 trillion) same period last year, 3.5 months of import cover, below the desired minimum of at least 4 months.
Petroleum products are among Kenya’s key imports and stand to be affected by a weak shilling, with high prices having multiplier effects in the transport sector, farm production and manufacturing.
Others are fertilizer, edible oil, steel and clinker among others, with an assortment of raw material importers by local factories also costing more on a weaker shilling.
According to the Kenya Association of Manufacturers, local industries have no option but “to pass extra costs to retailers” and ultimately consumers of the products.
A weak shilling also means costly electricity as power producers factor in forex adjustments, with consumers paying the price in their final bills.
Kenyan Shilling depreciated against all major international trading currencies in the third quarter of 2023 compared to the corresponding quarter in 2022, Kenya National Bureau of Statistics data shows.
On average, the Kenyan Shilling ceded ground against the Euro, Pound Sterling, US Dollar and Japanese Yen by 30.3 per cent, 29.7 per cent, 20.6 per cent, and 15.3 per cent, respectively.
The local currency also notably depreciated against South African Rand, Tanzania Shilling and Uganda Shilling.
Central Bank of Kenya has been adamant in cushioning the shilling in recent months, as it tries to allow it finds its footing, even as it carefully monitors other factors, including increasing interest rates to try and tame inflation.
