The Kenya Shilling depreciated by 1.1 percent against the US Dollar in July to close at 107.7 shillings, from 106.5 shillings recorded at the end of June.
“The depreciation of the local currency is due to increased dollar demand by both banks and merchandise importers,” said analysts from Cytonn Investments.
During the week, the Kenya Shilling appreciated marginally by 0.3 percent against the US Dollar to close at 107.7 shillings from 108.0 shillings recorded the previous week.
The slight appreciation during the week was attributable to subdued dollar demand from merchandise importers and players in the energy sector.
On a YTD basis, the shilling has depreciated by 6.3 percent against the dollar, in comparison to the 0.5 percent appreciation in 2019.
“We expect continued pressure on the shilling,” said Cytonn.
Pressure on the shilling will continue coming from the demand from merchandise and energy sector importers as they beef up their hard currency positions.
A deteriorating current account position, with the current account deficit deteriorating by 10.2 percent during Q1’2020, to 110.9 billion shillings, from 100.6 billion shillings recorded in Q1’2019 will hurt the shilling in the short-term.
The deteriorating current account position is due to the 0 percent decline in the secondary income balance, to 124.1 billion shillings from 128.0 billion shillings in Q1’2019.
The current account has also been affected by a 67.0 percent decline in the services trade balance (the difference between the imports and exports of services) to 20.4 billion shillings from 61.9 billion shillings.
The shilling is however expected to be supported by high levels of forex reserves, currently at USD 9.4 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.
There is an improving diaspora remittance evidenced by the 24.0 percent increase to USD 258.2 million in May 2020, from USD 208.2 seen the previous month.
In terms of y/y performance, diaspora remittances increased by 6.2 percent to USD 258.2 mn in May 2020, from USD 243.2 million recorded in May 2019.