Shilling Remains Relatively Stable As Covid-19 Rises

During the week, the Kenya Shilling remained relatively stable depreciating marginally by 0.1 percent against the US Dollar to close the week at 106.9 shillings, from 106.8 shillings recorded the previous week.

The shilling was supported by increased forex reserves, which rose to a four-month high USD 8.5 billion as the Central bank received the USD 750.0 million from the International Monetary Fund for economic support.

On a YTD basis, the shilling has depreciated by 5.5 percent against the dollar, in comparison to the 0.5 percent appreciation in 2019.

Pressure on the shillings is likely to come from the high dollar demand from foreigners exiting the market as they direct their funds to safer havens.

There is also an increased demand as merchandise and energy sector importers beef up their hard currency positions amid a slowdown in foreign dollar currency inflows.

Currently, there is a subdued diaspora remittance, due to the decline in economic activities globally coupled with increased prices of household items leading to lower disposable income.

The support for the local currency is likely to come from high levels of forex reserves, currently at USD 8.5 million above the statutory requirement of maintaining at least 4.0-months of import cover, and the EAC region’s convergence criteria of 4.5-months of import cover.

As a result of inflows from the IMF Rapid Credit Facility (RCF) approved during the week reserves rose by 8.7 percent to USD 8.4 million from USD 7.8 million.

Inflation Projection

“We are projecting the y/y inflation rate for May 2020 to remain stable within the range of 5.5 – 5.7 percent compared to 5.6 percent recorded in April,” says Cytonn Investments in their weekly report.

The decline in oil prices (petrol prices by 10.3 percent and diesel prices by 19.7 percent), which has not led to a reduction in transport prices due to the measures taken by the government to curb the spread of COVID-19 will shield the rise of inflation.

Food prices have remained relatively stable during the month but there is an upward bias due to the expected lower supply of foodstuffs as the effects of the locust invasion and recent floods take a toll on food production.

The reclassification of the Food Index in the Consumer Price Index from 36.0 percent to 32.9 percent, which is expected to have an impact on the final inflation figures.