Prices of basic commodities are likely to shoot further as the shilling continues to plummet against the dollar.
The shilling hit a high of Sh104.08 against the dollar at 10.40am yesterday, before the Central Bank intervened by supplying more dollars from foreign reserves into the market to stabilise the local currency. It closed the day at Sh103.17.
“The Kenyan shilling will see greater downward pressure in the quarters ahead given challenges to the growth outlook and higher inflation,” Global ratings firm Fitch Solutions said in a report released yesterday.
The report dubbed Africa Monitor- East and Central Africa for December notes that the introduction of VAT on fuel products will negatively impact business operations by hiking operational costs. The firms will then be forced to pass down the costs to consumers.
“We forecast the shilling to weaken to Sh103.5 against the dollar by end of 2018, down from 100.9 at the time of writing,” the report said.
Kenya imports most basic commodities including food stuff and petroleum products. As a result, the country’s trade deficit for the January to August period stood at Sh777.87 billion.
According to the IMF, an import to export ratio of around three to one shows that the shilling’s strength may be compromising Kenya’s export market.
In a report released last month following a review on Kenya’s economic health, IMF said the shilling may be overvalued by up to 17.5 per cent adding that it risked being classified as “managed” rather than operating on the forces of demand and supply.
“Reflecting limited movement of the shilling relative to the US dollar, MCM’s (Monetary and Capital Markets Department) 2018 report on exchange rate arrangement to be published in February 2018 will reclassify Kenya’s Shilling from floating to other managed arrangement,” IMF said.
Given the Shilling stood at an average Sh101.8 in October when the report was released, the shilling’s actual value can be estimated at around Sh119.62.
The Shilling has already depreciated 1.35 per cent compared to last month with Renaissance Capital estimating the value will drop further to Sh105 against the Dollar as the year closes.