The Shilling Appreciates as Inflationary Pressures to continue Mounting

The Kenya Shilling appreciated last week gaining marginally by 13 bps against the dollar to close the week at 103.6 shillings from 103.8 shillings the previous week on account of low dollar demand and dollar inflows from non-governmental organizations.

On a year to date basis, the shilling has depreciated against the dollar by 1.1 percent. In recent months, the forex reserves have reduced to USD 6.9 billion which is an equivalent to 4.6 months of import cover, from USD 7.8 billion in October 2016 which is an equivalent to 5.2 months of import cover.

The level of forex reserves has now stabilized, an indication of the confidence of the Central Bank with the current levels of the shilling. The Kenya Shilling trades freely, but the Central Bank occasionally intervenes in the market to reduce the rate of the currency volatility.

For the month of February, the government is seeking to issue a new 12-year amortized Infrastructure Bond (IFB 1/2017/12) with an effective tenor of 8.8 years, in a bid to raise 30.0 billion shillings for partial support of infrastructural projects in the roads, energy and water sectors.

Inflation Pressure

Inflationary pressures are expected to increase in the first half of 2017 due to:

• the ongoing drought that is affecting food supply and has led to an increase in electricity tariffs,
• the increase in oil prices in the international market,
• the strengthening of the dollar.

This week, the Energy Regulatory Commission (ERC) increased the forex levy on power bills in the month of February by 52.4 percent to 1.3 shillings from 0.8 shillings per Kilowatt hour in January, as they pass on the effects of the strengthening dollar to the consumers.

Kenya continues to be a great entrepreneurs’ hub and next week the country shall be hosting the Africa Finance and Investment Forum (AFIF), an event organized by the European Market Research Centre (EMRC), which is focused on strengthening the private sector in Africa by boosting entrepreneurship and attracting investments into the continent, with the aim of creating vibrant economies through the encouragement of entrepreneurship. A total of 300 participants are expected to attend the forum, comprising of financiers, market specialists, government representatives, investors and policy makers. Despite being an election year in Kenya, the country continues to experience stabilized macroeconomic conditions amidst global economic shocks, proving it to be a preferred investment destination for foreign investors.