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Shilling Depreciates Against the Dollar But CBK Has it Covered

BY Juma · January 31, 2017 06:01 am

The Kenya Shilling depreciated against the US Dollar by 10 bps during the week to close at 104.0 shillings from 103.9 shillings on account of increased demand from importers mainly in the crude oil and retail segments.

On a year to date basis, the shilling has depreciated against the dollar by 1.4 percent. In recent months, the forex reserves have reduced to USD 6.9 billion (equivalent to 4.5 months of import cover), from a peak of USD 7.8 billion in October 2016 (equivalent to 5.2 months of import cover). According to Cytonn Investments, this is concerning as the rate of decrease in the forex reserves could be an indication that the CBK is using reserves to support the shilling.

However, Cytonn says that it is important to note that if the reserve levels drop too low, the government can access the IMF credit facility comprised of a USD 989.8 million 24-month Stand-By Agreement (SBA) and USD 494.9 million 24-month Stand-By Credit Facility (SCF) bringing the combined facility to USD 1.5 billion.

Despite the government having access to this facility, adding USD 1.5 billion to the reserves will only improve the reserve position by 1.0 month of import cover, which still will not be sufficient for a net importing economy like Kenya given the export and import structure.

In order to achieve long term stability of the shilling, the government needs to work on:

  • the country’s import and export structure,
  • promoting tourism in order to attract foreign inflows,
  • setting up processes that encourage diaspora remittances,
  • reducing the fiscal deficit in order to reduce appetite for dollar denominated debt,
  • improving the business environment in order to attract more foreign investments into the country.

The Central Bank of Kenya has insisted that the shilling is still stable and warned those who are trying to raise false alarm that the shilling was under attack.

Juma is an enthusiastic journalist who believes that journalism has power to change the world either negatively or positively depending on how one uses it. (020) 528 0222 or Email: info@sokodirectory.com

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