Kenyan Shilling Under Pressure as MPC Expected To Meet

The Kenya shilling remained unchanged against the dollar during the week closing at 103.3 shillings. However, the shilling is likely to come under pressure in the coming week on account of the usual end month dollar demand from oil importers.

On a year to date basis, the shilling has depreciated against the dollar by 0.8 percent. With the current forex reserve level, currently at USD 8.2 billion (equivalent to 5.4 months of import cover), and the IMF maintaining Kenya’s precautionary credit facility at USD 1.5 billion (equivalent to 1.0 more month of import cover) that Kenya can draw on in case of any balance of payment emergencies, we believe that the shilling should remain stable in the short term.

According to Cytonn Investments, the inflation for the month of May to rise to between 12.3 – 12.5 percent from 11.5 percent in the month of April mainly driven by a rise in food prices caused by the ongoing drought. Cytonn says that upward inflationary pressures are likely to persist, driven by:

• the food component of the Consumer Price Index (CPI) basket due to the persistent dry weather that is expected to carry on for the first half of the year, with depressed rainfall in the long rains season that comes in between March and May.
• the price of cereals is likely to increase given that the cost of army worm pesticide has been increased to 2,000 shillings for pesticide enough for a 90-kg maize bag, from 1,700 shillings previously, considering that 15 agriculture-rich counties have been affected by the pest. We expect upward inflationary pressures to persist and inflation to average 11.8 percent in 2017.

The Monetary Policy Committee Meeting (MPC)

The Monetary Policy Committee (MPC) is set to meet today (Monday 29^th) to review the prevailing macro-economic conditions and give the direction of the Central Bank Rate (CBR). In their previous meeting, held in March 2017, the MPC maintained the CBR at 10.0 percent. Key to note also as MPC meets is that the country is currently experiencing cost-push inflation and hence increasing the CBR will not be as effective in curbing inflationary pressure; raising the CBR is only effective when dealing with demand-pull inflation.

The African Economic Outlook 2017 released during the week, indicated that Africa is expected to grow by 3.4 percent and 4.3 percent in 2017 and 2018 respectively from 2.2 percent in 2016. The growth is expected to be supported by:

• recovery of global commodity prices,
• increased capital flows into Africa projected at 1.1 percent in 2017 to USD 179.7 bn from USD 177.7 billion in 2016, with the bulk of this expected to come from diaspora remittances and Foreign Direct Investment (FDI) at 36.8 percent and 32.0 percent of the total capital flows, respectively.